THE FUTURE OF MONEY— PART 1
Y4.B 22/1:104-27
The Future of floiiey - Part 1; Seria...
iF9-7 HEAKING
^^3'^'^ BEFORE THE
'"^^^^ SUBCOMMITTEE ON
DOMESTIC AND INTERNATIONAL MONETARY POLICY
OF THE
COMMITTEE ON BANKING AND
FINANCIAL SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTH CONGRESS
FIRST SESSION
JULY 25, 1995
Printed for the use of the Committee on Banking and Financial Services
Serial No. 104-27
U.S. GOVERNMENT PRINTING r^^^^f^' ,f '^^
WASHINGTON : 1995
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-052055-X
\A
THE FUTURE OF MONEY— PART 1
Y 4, B 22/1:104-27
I
Thf Future of noiieg - Part 1, Seri)...
Fs-7 HEARING
^5 3 G> 6 BEFORE THE
'^^^ SUBCOMMITTEE ON
DOMESTIC AND INTERNATIONAL MONETARY POLICY
OF THE
COMMITTEE ON BANKING AND
FINANCIAL SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTH CONGRESS
FIRST SESSION
JULY 25, 1995
Printed for the use of the Committee on Banking and Financial Services
Serial No. 104-27
' : n
U.S. GOVERNMENT PRINTING OFFICE
92^89 CC WASHINGTON : 1995
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington. DC 20402
ISBN 0-16-052055-X
HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES
JAMES A. LEACH, Iowa, Chairman
BILL McCOLLUM, Florida, Vice Chairman
MARGE ROUKEMA, New Jersey
DOUG BEREUTER, Nebraska
TOBY ROTH, Wisconsin
RICHARD H. BAKER, Louisiana
RICK LAZIO, New York
SPENCER BACHUS, Alabama
MICHAEL CASTLE, Delaware
PEIER KING, New York
EDWARD ROYCE, California
FRANK D. LUCAS, Oklahoma
JERRY WELLER, Illinois
J.D. HAYWORTH, Arizona
JACK METCALF. Washington
SONNY BONO, California
ROBERT NEY, Ohio
ROBERT L. EHRLICH, Maryland
BOB BARR, Georgia
DICK CHRYSLER, Michigan
FRANK CREMEANS, Ohio
JON FOX, Pennsylvania
FREDERICK HEINEMAN, North Carolina
STEVE STOCKMAN. Texas
FRANK LoBIONDO, New Jersey
J.C. WATTS, Oklahoma
SUE W. KELLY, New York
HENRY B. GONZALEZ, Texas
JOHN J. LaFALCE, New York
BRUCE F. VENTO, Minnesota
CHARLES E. SCHUMER, New York
BARNEY FRANK, Massachusetts
PAUL E. KANJORSKI, Pennsylvania
JOSEPH P. KENNEDY II, Massachusetts
FLOYD H. FLAKE, New York
KWEISI MFUME, Maryland
MAXINE WATERS, California
BILL ORTON, Utah
CAROLYN B. MALONEY, New York
LUIS V. GUTIERREZ, Illinois
LUCILLE ROYBAl^ALLARD, California
THOMAS M. BARRETT, Wisconsin
NYDIA M. VELAZQUEZ, New York
ALBERT R. WYNN, Maryland
CLEO FIELDS, Louisiana
MELVIN WATT, North Carolina
MAURICE HINCHEY, New York
GARY ACKERMAN, New York
KEN BENTSEN, Texas
BERNARD SANDERS, Vermont
Subcommittee on Domestic and International Monetary Policy
MICHAEL CASTLE, Delaware, Chairman
EDWARD ROYCE, California, Vice Chairman
FRANK LUCAS, Oklahoma FLOYD H. FLAKE, New York
JACK METCALF, Washington BARNEY FRANK. Massachusette
BOB BARR, Georgia JOSEPH P. KENNEDY II, Massachusetts
DICK CHRYSLER, Michigan CAROLYN B. MALONEY, New York
FRANK LoBIONDO, New Jersey LUCILLE ROYBAL-ALLARD, California
J.C. WATTS, Oklahoma THOMAS M. BARRETT, Wisconsin
SUE W. KELLY, New York CLEO FIELDS, Louisiana
ROBERT NEY, Ohio MELVIN WATT, North Carolina
JON FOX, Pennsylvania
BERNARD SANDERS, Vermont
(II)
CONTENTS
Page
Hearing held on:
July 25, 1995 1
Appendix:
July 25, 1995 45
WITNESSES
Tuesday, July 25, 1995
Chaum, David, Chairman and Chief Executive Officer, Digicash, Inc 7
Cook, Scott, Chairman, Intuit, Inc 18
Fisher, Rosalind L., Executive Vice President, Visa, U.S.A 12
GofT, Heidi, Senior Vice President, MasterCard International, Inc 15
Melton, William N., Chairman and Chief Executive Officer, Cybercash, Inc. ... 9
Van Lear, David, President, Electronic Payment Services 4
APPENDIX
Prepared statements:
Castle, Hon. Michael N 46
Flake, Hon. Floyd H 48
Royce, Hon. Edward 52
Metcalf, Hon. Jack 54
Watts, Hon. J.C, Jr 56
Maloney, Hon. Carolyn B 57
Chaum, David 133
Cook, Scott D 168
Fisher, Rosalind L 146
Con; Heidi 163
Melton, William N 143
Van Lear, David M 58
Additional Material Submitted for the Record
Chaum, David, paper entitled "Achieving Electronic Privacy," Scientific Amer-
ican, pp. 96-101, August 1992 137
Fisher, Rosalind L.:
Coin World, "Visa poised to replace small notes, coins with chip-based
debit cards in United States," Julv 17, 1995, Vol. 36, No. 1840 158
Financial Times, "An imagined world of 'digital cash'" June 7, 1995 160
The New York Times, "Microsoft Developing Electronic Cash Card," June
12, 1995 161
Bank Letter, a publication of Institutional Investor, Inc., "Mint Director
Eyes Government Role In Plastic Money — Treasury On Board," June
26, 1995 162
Van Lear, David M.:
"The Ease of Using Ecash" 69
Biography 78
Electronic Payment Services, Inc.:
Introduction 79
Background 80
BUYPASS Corp., Background 81
Money Access Service, Inc., Background 82
American Banker, "Network Pushes Ahead With Smart Card Trial," April
6, 1995 ; 83
(III)
IV
Page
""■ ^'C'^Yo^kTFX'Z^r.i U, the ■Nightmare' o"^^^'^, „
Business Week^'^TheFuiure of Money," June 12, 1995 ••■ 89
Charts
THE FUTURE OF MONEY— PART 1
TUESDAY, JULY 25, 1995
House of Representatives,
Subcommittee on Domestic and
International Monetary Policy,
Committee on Banking and Financial Services,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:02 a.m., in room
2128, Rayburn House Office Building, Hon. Michael N. Castle
[chairman of the subcommittee] presiding.
Present: Chairman Castle, Representatives Royce, Lucas,
Metcalf, Chrysler, Kelly, Fox, Flake, Maloney, and Watt.
Chairman Castle. The subcommittee will come to order. Wel-
come to the House Banking and Financial Services Committee,
Subcommittee on Domestic and International Monetary Policy
hearing. That is a very long name. Monetary Policy is probably the
correct name. This hearing is on the future of money. Again, this
subcommittee is positioned to have initial jurisdiction of an impor-
tant area of public policy.
Mr. Lucas is here. You do not see other Members, but as I ex-
plained to the panelists, Members will come and go during the
course of the day. Their staffs are here.
We have your testimony. We look forward to hearing your oral
testimony. We will go through each of you, from Mr. Van Lear all
the way over to Mr. Cook, and we have asked that you keep your
comments to 10 minutes or less. Less is always preferable, but
we will not hold you to anything up to 10 minutes in terms of
penalties.
We may have to break from time to time for votes, which is usu-
ally about a 15-minute, although it could be longer, interruption.
The faster we can go earlier on, the less likely we are to run into
vote problems, so we will try to go through this.
When your testimony is over, each Member will be allowed to
ask you questions of up to 5 minutes in duration. If we have time
when all the Members who have come in or are available to ask
questions are done, we will have another round of questions. I real-
ize at this point, we could be going on to 12:00, 1:00, 1:30 in the
afternoon. Some of you may say, I have to go or whatever. Please
let our staff know and we will try to adjust the questions so that
we do not mess up anyone's airline schedules or whatever it may
be, but we appreciate all of you being here.
The future of money contains the potential both for great com-
mercial promise and for enormous risk of undermining the system
of exchange and the administration of justice. This is true whether
(1)
the media of exchange enter electronic commerce using computers
linked into networks or via computer chips embedded in cards or
other devices.
At a recent hearing on the dollar coin before the Senate Banking
Committee, Philip Diehl, Director of the Mint, noted that the state
of affairs with electronic forms of money was analogous to the situ-
ation before the Civil War, when local banks issued their own
paper money. He foresees that, left alone and unregulated, the
market may produce an electronic 'Tower of Babel", with no single
standard of technology and many opportunities for law avoidance
and criminal transactions.
We will begin to explore these emerging third wave forms of cur-
rency and begin to define the appropriate role of the Federal Gov-
ernment with reference to this evolving technology. This will not be
accomplished in a single day or one hearing. This morning, we will
hear from a panel of six expert witnesses, all from the private sec-
tor. With their assistance, we will begin to consider some of these
vital issues.
At a later hearing, governmental entities with responsibilities in
the management of the integrity of our monetary system and oth-
ers with responsibilities for the enforcement of laws relating to it
will testify. At that time, we will consider in greater depth public
policy issues raised today.
With more than $2 trillion currently moving electronically each
day between U.S. institutions, the safety and security of this sys-
tem is not to be taken lightly. Basic requirements are clear. Pay-
ment instruments must be widely accepted, convenient, cost effec-
tive, safe, and confidential to ensure wide usage. The legitimate
law enforcement and public policy interests of the government
must also be recognized. Cooperative efforts between banks as an
industry and between banks and the government have made the
current payment instruments successful and widely used, and if
these precedents are applied in future payment mechanisms, they
may be made similarly successful.
I had the occasion last night in preparing for this hearing to look
at this tape on Mondex, which I am sure is familiar to all of our
panelists, which Nat West has started, I guess, over in England.
It all looks very easy and very simple here and everybody already
seems to have their Mondex machine, which probably is not exactly
the case of all the businesses in the country. But it gives you some
idea of the electronic exchange of money, being able to obtain your
balance and being able to travel just with a card.
We are going to have other demonstrations today. We have some
stored value cards right here on the desk which we are going to
see.
In also preparing for this hearing last week, I met with a con-
stituent who has helped with this. I was told that he had pur-
chased a flashlight via the Internet using CyberCash, which is a
secured payment system. Indeed, I have that flashlight here today.
This was purchased with a credit card on the computer using the
Internet without any kind of other transaction and the money was
transferred from one to the other. After a wait of a little while, this
flashlight came.
I am not sure I would have bought this flashHght, to be totally
candid with you. It has got a radio on it, it has got a flashlight,
and it has got a siren, so this is a highly safe flashlight, if you will,
that does a little bit of everything. But the point is not the flash-
light itself. The point is that we are now able, in this day and age,
even, although some of us can barely read our e-mail, there are
those out there who can, indeed, make acquisitions through the
Internet using CyberCash or other systems in order to do that.
That shows you, I think, the beginning of the trend that we are
going to see.
We are, indeed, fortunate to have before us some of the pioneers
of the new electronic payments technology to discuss their cre-
ations and the implications of its implementation. By the way, I
think you truly are pioneers. To save time, I am not going to go
through a lot of resumes, although I am going to explain who each
of you are. But I think it is worthwhile to note to the audience that
we are dealing with individuals who are at the very cutting edge
of this not necessarily new technology but new application of the
technologies which may have existed for some time.
We are going to have each of you testify, starting with Mr. Van
Lear. In order, it will be David Van Lear, who is the President of
Electronic Payment Services, which I am proud to say is located in
my State. Next will be Dr. David Chaum, who is the Chairman and
CEO of DigiCash, Inc. Then we have William Melton, who is the
Chairman and CEO of CyberCash, Inc., who brought us our flash-
light here.
Then we have Rosalind Fisher, who is Executive Vice President
of Visa USA, and I see some Visa cards up here. Heidi Groff is a
Senior Vice President of MasterCard International. And we have
Scott Cook, who has received a lot of attention lately in the news,
who is the Chairman of Intuit, Inc. He is the owner and developer
of Quicken, by far the leading personal finance and home banking
software.
You are kind to come here today. You are kind to give us your
time. We will try to give you all the time and attention we can, and
you may rest assured that whatever information is brought forth
here will be spread throughout the Congress so that we will all be-
come more familiar with it.
Let me turn to the other Members and see if they wish to make
opening statements and then we will turn to you.
Mr. Lucas.
Mr. Lucas. I have no opening statement.
Chairman Castle. Mr. Chrysler.
Mr. Chryslf]!^. I just want to welcome you here and I appreciate
the card. I brought similar ones in when I testified in front of the
Ways and Means Committee on medical savings accounts and gave
every Member one that had their name on it. I appreciate the
memento.
Chairman Castle. Thank you, Mr. Chrysler.
Without further ado, Mr. Van Lear, we will turn to you, sir.
STATEMENT OF DAVID VAN LEAR, PRESmENT, ELECTRONIC
PAYMENT SERVICES
Mr. Van Lear. Thank you. Good morning, Mr. Chairman and
members of the subcommittee. It is a great honor to speak with you
today at these hearings on the future of money. My name is David
Van Lear. I am Chairman and Chief Executive Officer of Electronic
Payment Services, Incorporated, also known as EPS.
EPS was formed a little more than 2 years ago to serve the
present and lead the future development of electronic payment sys-
tems. We have become one of the leading electronic transaction
processors in the United States, processing 1.5 billion transactions
annually. EPS is headquartered in Wilmington, Delaware, and
serves as the parent company for two subsidiaries, Money Access
Service, Incorporated, and BUYPASS Corp. EPS, in turn, is owned
by five major regional bank holding companies. Banc One Corp.,
CoreStates Financial Corp., KeyCorp, National City Corp., and
PNC Corp.
Money Access Service operates the MAC shared ATM and point-
of-sale network, the largest in the United States measured by
transactions processed through our switch, more than 900 million
annually. The MAC network is found in 34 of the 50 States. We
serve 1,700 financial institutions, and these institutions operate
18,200 ATMs and 150,000 point-of-sale terminals. Thirty-two mil-
lion customers carry MAC-branded ATM cards.
BUYPASS Corp., is a leader in point-of-sale processing. It serves
financial institutions and merchants in all 50 States. BUYPASS's
particular expertise lies in processing payments for the petroleum,
convenience store, and supermarket industries. BUYPASS proc-
esses more than 500 million transactions annually.
It is from a base of over 25 years of experience in this industry
that I want to speak to you today about how electronic commerce
functions today and about those issues which are important to pre-
serve public confidence in new forms of electronic money in the
future.
What is electronic commerce? It is commerce which takes place
using some form of electronic processing based on a means of ex-
change. It includes wire transfers, where an individual delivers
currency to one location with an instruction to send to another,
where funds are disbursed to an authenticated party.
Electronic commerce is also found in the use of credit and debit
cards, which are accepted by merchants for purchases and then au-
thorized and settled electronically. It is also the electronic process-
ing used to dispense money or take deposits through ATMs. And,
it is the electronic banking which takes place from the home tele-
phone or computer.
In each of these examples, commerce is facilitated by money
which is, at some point in time, electronic.
These electronic forms of money work because the public has con-
fidence in the systems behind each of them. The systems have in-
tegrity. Part of this integrity comes from the involvement of finan-
cial institutions. In the United States, financial institutions have
fiduciary responsibilities which assure the safety and soundness of
the overall system.
Another means of assuring system integrity is through the regu-
lation of providers within these financial systems. In the case of fi-
nancial institutions, regulation comes from government. In the case
of non-financial institutions which operate within these systems,
oversight comes from operating regulations which contractually
bind them.
Consumer confidence in electronic money is further enhanced by
the system's security, which assures all participants that only the
appropriate parties have access to sensitive information as well as
to the funds being transferred. Privacy is directly linked to system
security.
Authentication of electronic money transactions gives partici-
pants the assurance that the transactions are valid. Validity is
reinforced through the ability of a central authority to track elec-
tronic transactions and post facto audit the system to maintain in-
tegrity. This tracking gives the government and system partici-
pants the ability to track the amounts of electronic money flowing
through the system as well as its velocity. Both Federal and State
taxing authorities can use it as a check on tax liabilities.
Jurisdiction of the system is through applicable laws. One of
their roles is to protect consumers against fraud. This, then, is our
current system.
As new forms of electronic money evolve, we need to ensure that
participants have the same level of confidence in these new sys-
tems as they do in the present ones and we need to protect the
present systems from any potential negative fallout from new, less
secure services.
We believe the following issues, therefore, must be addressed as
new electronic money systems are enabled. System integrity — the
system must be able to be trusted to work properly every time.
Safety and soundness of system and providers — there must a
high level of trust in how the system functions today as well as the
fact that it will be there tomorrow.
Regulation — rules to ensure compliance to a set of standards
must exist.
Security and privacy — the proper controls must be in place to en-
sure privacy within the system.
Authentication — a vehicle to ensure transaction validity must
pervade the system.
Money supply, tracking and velocity — to the extent that this elec-
tronic money is involved in commerce, a vehicle to track its amount
and velocity must be present.
Taixability — transactions cannot be so anonymous that taxing au-
thorities lose the ability to assess sales and other legitimate taxes.
Auditability — to ensure system integrity, it must be auditable.
Fraud control — there must be measures to track, minimize, and
control fraud.
And finally, sovereignty issues — there must be a clear definition
as to which laws apply within an electronic money system. This in-
volves both domestic and international transactions.
To illustrate the potential impact of some of these issues, let us
turn to one of the electronic money systems which is being envi-
sioned, transactions of business over the Internet. The Internet is
a series of computers linked together in a system where each com-
puter is equal.
On the Internet, there is no central authority through which all
information must pass. Therefore, there is no one body which can
assure participants that the system has integrity. From a safety
and soundness perspective, it is difficult to tell if a transaction has
taken place, since there is no central authority to track and report
it.
Further, there are currently no standard operating regulations
for electronic money on the Internet and it is unclear as to which,
if any, government or non-government regulations apply.
From a tax perspective, transactions can be conducted over the
Internet anonymously. This anonymity and inability to track trans-
actions could impact on a State or national government's ability to
tax that transaction.
The Federal Reserve does not currently know how to track flows
of electronic commerce on the Internet to measure both amounts
and velocity of the money supply. In addition, there is no central
authority to track and report on criminal activity, including coun-
terfeiting and money laundering.
There are also implications relative to fraud and consumer liabil-
ity. Who is liable in the event of lost or non-delivery of goods or
defalcations on the part of third party providers? Does, in fact, the
consumer bear the financial risk in a system of electronic money
on the Internet?
What about the situation where a consumer buys goods from an-
other country over the Internet but the goods never arrive because
the merchant never sends them? Who protects the consumer in this
instance of fraud? Do foreign laws or U.S. laws apply?
In summary, there are no laws which apply specifically to com-
merce on the Internet. Who will establish them? Who has jurisdic-
tion over a transaction, the laws of the purchaser in one country
or the seller in another?
The issue is not a United States only issue. It is one that impacts
on every country in the world which has active computers on the
Internet, presently over 10,000 computers in over 90 countries.
Today, you will hear from a number of organizations interested
in facilitating new forms of electronic money. We believe that it is
important to begin discussions addressing these issues.
We are not in favor of undue regulation but we do believe that
proper care must be taken to ensure that participants in these new
electronic forms of money are capable of having the same level of
confidence in them as they do in the current systems which func-
tion well for all of us.
Let me add, Mr. Chairman, we are aware of what these issues
are, and in some cases, solutions are already in place. It is our in-
tent to assure that, at a minimum, the protections that exist in to-
day's systems will be incorporated into these future systems.
Thank you very much.
[The prepared statement of Mr. David Van Lear can be found on
page 58 in the appendix.]
Chairman Castle. Thank you very much, Mr. Van Lear. I note
that you raised a lot of questions, for all of us, as part of your testi-
mony. We appreciate your testimony.
Dr. Chaum, we look forward to your testimony, sir,
STATEMENT OF DAVID CHAUM, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, DIGICASH, INC.
Mr. Chaum. Mr. Chairman, members of the subcommittee, as an
American who is regarded as the inventor of electronic cash, who
has worked over the last dozen years or so to make the technology
viable, and who is now CEO of a leading company pioneering in its
commercialization, I am very pleased by the interest shown here
and to be here today.
We are being forced to decide between two very different kinds
of electronic payment technology. The core values we as a nation
have fought mr and continue to stand for are at stake. As a con-
sequence of choosing one of the two directions, these values will be
profoundly eroded. By choosing the other direction, however, they
will be preserved and likely extended. Wise decisions at this critical
juncture may also allow us to avoid certain other pitfalls and to re-
alize economic leadership and growth.
I think my limited time before you is best used to briefly explain
the fundamentally different approaches to security before coming to
privacy, privacy technology, and its implications.
Security is simply the protection of interests. People want to pro-
tect their own money and banks their exposure. The role of govern-
ment is to maintain the integrity of and confidence in the whole
system. With electronic cash, just as with paper cash today, it will
be the responsibility of government to protect against systemic
risk. This is a serious role that cannot be left to the micro-economic
interests of commercial organizations.
In order for those in government to make informed decisions, it
will be necessary for them to understand the basic ways to secure
transactions, particularly in different situations.
One basic form is tamper resistance, exemplified by the chip in
a chip card. It is designed to be hard to modify or to read secrets
from. Such tamper resistance is needed for so-called off-line pay-
ments, those in which the reader device receiving payment from a
card validates payments by contacting a central system only at the
end of each day. Incidentally, this and the other basic form must
rely for security on cryptography, sometimes referred to as
encryption, which is fundamental to all information security.
The second basic form is where the individual uses their own
computer, whether a desktop, laptop, or palmtop device. Such soft-
ware only is all that is needed in an on-line system, that is, a sys-
tem in which the party receiving payment communicates over a
network during each payment.
The trend is toward convergence of these two forms into a hy-
brid, since people do not want incompatible forms of money and
since it offers the best of both worlds in terms of convenience. In
other words, you will put a chip card into a user-friendly electronic
device of your own choosing, whether on your desk, in your living
room, or in your pocket, and I have brought some examples to show
you. This is a CAFE wallet. I am the Chairman of the CAFE
Project, which is sponsored by the European Commission. I will
come back to it. You can pay either with the card or by infrared
using this wallet.
The problems I see in the industry today reflect a lack of archi-
tecture, and architecture is essential when building infrastructure,
which is what we are embarking on. In my view, a sound architec-
ture must, one, include the two basic forms of security and allow
for their integration into the hybrid. Two, prevent the vulnerability
of systemwide secrets from being stored in every card, or nearly as
bad, every off-line point of payment. And three, address privacy
concerns effectively, since they cannot be addressed as add-ons or
afterthoughts. Today, DigiCash systems are alone in having any of
these three attributes, and their architecture has all three.
Let me turn to the issue of privacy. A recent Harris poll of the
American public began by introducing respondents to all the
consumer benefits of the information superhighway. Then respond-
ents were told that in order to make such systems economically
viable, payment transaction data would have to be gathered and
used for purposes such as making special offers to them. But the
majority of respondents still objected to any use, other than con-
summation of the payment, and they gave privacy as the primary
reason.
Fully 82 percent of Americans today expressed concern over pri-
vacy of computerized data. That fraction has been growing steadily
ever since the so-called first wave of privacy concern was triggered,
when Americans began to see their name on punched cards and
printed on computer-generated forms.
When people are exposed to the information superhighway,
which provides an awesome glimpse of the power of modem infor-
mation technology, with dropping transaction costs leading to finer
granularity of payments, which we will be hearing more about
later, I assume, concern will reach new levels.
Privacy technology allows people to protect their own information
and other interests while, at the same time, maintains very high
security for organizations. Essentially, it is the difference between,
on the one hand, a centralized system with disenfranchised partici-
pants, like the electronically tagged animals in feedlots, and, on the
other hand, a system where each participant is able to protect its
own interest, like buyers and sellers on a town market square.
Take e-cash as an example of privacy technology. It provides a
fully digital bearer instrument, a number that is itself money, just
like a bank note is money. On the Internet, once someone down-
loads the requisite software, which takes only a few minutes, they
are ready to send and receive e-cash in payments.
Security of e-cash is superior to that of paper cash, and also for
the consumer, if it is stolen, it cannot be used. If someone refuses
to give you a receipt, you have proof that they deposited it. If it
is lost, you can get your money and records back. Counterfeiting
e-cash poses the same cryptographic challenge as breaking the
most sophisticated codes used to protect nuclear materials, military
secrets, and other large-value wire transfers. Therefore, e-cash is
certainly not a target of opportunity.
E-cash is already being experimented with on the Internet in a
worldwide monopoly money trial with tens of thousands of partici-
pants. Related card technology has been licensed to Amtech, based
in Dallas, for highway speed road tolls and road pricing, offering
privacy instead of dossiers on everywhere people drive.
And CAFE, the related device I showed you, the European Com-
mission-sponsored trial, of which I am the Chairman, at its head-
quarters building in Brussels has shown chip cards that can be in-
serted into electronic wallets, and so on, and provides actually an
electronic ECU. Such privacy technology has even been successfully
used by the participants at the most recent international meeting
of data protection commissioners.
E-cash has received substantial media coverage. Consequently,
the public is beginning to realize that the coming of electronic pay-
ments need not mean an obliteration of privacy. The superhighway
will give consumers unprecedented mobility to choose it.
Some concern about e-cash, however, has been raised by various
parties over possibilities it might open for illicit payments, but
there is simply no legitimate basis for these allegations. E-cash,
even when it were to achieve significant scale, is considerably less
dangerous to society than automatic teller machines.
For one thing, like cash, the amount withdrawn and deposited is
on record. For another, unlike cash, the amounts of money that
pass through each person's hands are also on record at the bank.
E-cash itself is less prone to abuse than paper bank notes because
privacy is one way, which means that an extortionist, a seller on
a black market, or the acceptor of a bribe is forever vulnerable to
being irrefutably incriminated by the party that paid him.
Governments who stifle the new technology while it is still in its
infancy, before it has had a chance to develop and to harmonize
with our institutions who do not proactively support needed infra-
structure, who fail to establish confidence by protecting against
systemic risk, will be left behind in global competition. Countries
who take clear positions based on understanding of the technology,
however, and encourage needed developments stand to gain enor-
mous growth and market leadership.
Privacy technology, whether used for electronic payments, voting,
or other public expression, is the electronic equivalent of a free
market and democracy. People will come to insist on it as an infor-
mation human right. Thank you.
[The prepared statement of Mr. David Chaum can be found on
page 133 in the appendix.]
Chairman Castle. Thank you very much. Dr. Chaum. We appre-
ciate it.
Mr. Melton, we look forward to your testimony, sir.
STATEMENT OF WILLIAM N. MELTON, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, CYBERCASH, INC.
Mr. Melton. Monetary systems are ultimately founded on trust,
trust that your money will be there when you want it and its value
will be relatively stable. That trust exists now in a three-dimen-
sional world because of a strong global banking system backed by
stable national governments.
We at CyberCash believe that commerce on the Internet will best
be served by facilitating the transition of existing payment systems
and the trust that is carried with them into cyberspace. While new
payment systems and new monetary systems may ultimately
evolve in the future, CyberCash believes that the best way to get
10
there is to build on the trust that already exists in our present
monetary system.
Accordingly, CyberCash builds technology tools, tools for banks,
tools for credit card associations, and tools specifically for the
Internet.
If we divide the world into walk-around money that might be an
electronic card and what we call net-around money that exists on
the Internet, CyberCash is focused strictly on the net-around
money.
Our technology tools facilitate the use of a variety of payment in-
struments on the Internet, but our focus is primarily on consumer
payment instruments, including credit cards and checks. Of course,
our technology does not actually push a credit card or anyone's
checkbook over the wires of the Internet. Rather, CyberCash pro-
vides software-based technology which passes secure information
over the Internet. That secure information becomes the functional
equivalent of the physical plastic or of the paper check. The soft-
ware-based technology tools will permit and do permit the smooth
integration of the new information-based plastic cards or the new
electronic checks with the older manual systems.
For example, as the credit card associations announce standards
coming soon governing the use of their credit card systems on the
Internet, CyberCash creates software which implements these
standards. CyberCash provides this software free of charge to the
banks and to the credit card associations, who, in turn, provide
that software to merchants and consumers.
Software components work in unison, transporting credit card in-
formation securely to the acquiring bank of the authorized mer-
chant. The acquiring bank, as part of their normal discount rate
that they charge to a merchant, assumes then the cost of transport-
ing that transaction through the Internet, providing CyberCash a
small fee for transport. This is the functional equivalent of an 800-
number call cost which the acquiring bank assumes and pays
today.
Though the physical plastic may be missing from this trans-
action, there is much more security and much more privacy on the
Internet than exists in the physical world. In this new Internet
transaction, all the parties, that is, the consumer, the merchant,
and the bank, are authenticated using a technology called digital
signatures. These digital signatures are many times more secure
than any handwritten signature that we might use today. The
consumer on the Internet will no longer need to be concerned about
losing his credit card. Without the consumer's digital signature, the
actual card number is worthless on the Internet. The consumer can
have absolute confidence that the merchant he is dealing with is
an authorized merchant, guaranteed by the bank's digital signa-
ture. And, of course, the bank receives the non-deniable digital sig-
nature from both the consumer and the merchant. For privacy, all
transactions are completely encrypted and absolutely protected
from monitoring or tampering of any kind. Thus, on the Internet,
we simultaneously achieve dramatically improved levels of both
privacy and security.
Standing behind these systems is the entire strength of the
banks, the credit card associations, effectively the entire American
11
banking system. Since the introduction of credit cards, the industry
has continuously evolved systems which monitor and control risk.
During this same time, they have evolved systems that provide
ever more and ever more varied customer products to the
consumer. Competitive pressure is the engine that drives down
costs and squeezes risks out of the system.
As we move into the use of credit cards on the Internet, we urge
that competitive pressures which have driven the evolution of the
industry to date be trusted and be permitted to continue to drive
the evolution on the Internet.
Checks and checking accounts are even more a part of our lives
than our credit cards. To have a checking account, you do not have
to qualify under the rigid credit requirements of the credit card in-
dustry. To receive a check, you do not have to be a qualified mer-
chant. I often ask my friends in the credit card industry, when was
the last time they used a Visa or a MasterCard to send $10 to their
mother? Not recently. So checks are an important part of our eco-
nomic lives.
As the Internet in many ways is making geography evaporate
and the whole world exists more or less instantaneously on the PC
screen on your desk, so that same technology will give a whole new
utility and a whole new dynamism to that old checkbook in your
pocket.
While checks are wonderful, we, as a society, are fairly well edu-
cated that checks also have some problems, generally referred to as
an occasional bounce or an occasional forged signature. Well, we
have some good news for you. Those same software technology tools
that are being built to make credit cards safe on the Internet also
make checks safe on the Internet. With the speed and the instanta-
neous nature of the Internet, we no longer have to worry about
whether or not the check is good. We will know instantly at the
time we accept it. Through the software technology tools that
CyberCash is building for banks, funds will be certified prior to the
check being sent. Checks received by you, received within seconds
of their being sent, will be literally as good as money in the bank,
because that is exactly where the money will be, in the bank.
Also, the same technology of digital signatures and encryption
which we use to secure credit cards on the Internet will be used
to secure checks. No longer will there be forged signatures. Digital
signatures effectively eliminate forgery. No longer will there
be false claims of forgery. Digital signatures are essentially non-
deniable. No longer will there be theft of checks in the mail.
Checks will travel over the Internet in totally secured and
encrypted envelopes.
The automated check clearing system in the United States, in
spite of the problems of paper transport, has developed into a sur-
prisingly low-cost and efficient system. Most of the traditional
banking system is built around the accounting for and the manag-
ing of the fiow of paper checks around the country. Regulatory
agencies have built systems, in turn, to ensure the safety of the
banking system behind this massive fiow of checks.
By enabling checks on the Internet, we are building on this same
foundation. We are leveraging the experience of 100 years while
simultaneously removing some of the known problems.
12
Perhaps most importantly, checks represent a personal relation-
ship between the checkbook holder and his or her bank. In the new
world of the Internet, that special relationship between the check-
book holder and the bank will be given a new lease on life, and this
lease on life will be due to the technology of the Internet, namely
instantaneous transfer of information, digital signatures, and
encryption.
In conclusion, we would urge the subcommittee to join us in our
optimism in seeing the enhancement of some of the old payment
instruments by the new technology tools. We would further urge
the subcommittee to embrace our faith in the ability of the competi-
tive marketplace pressures to continue to bring consumers safer,
more convenient, and lower-cost payment options. Thank you.
[The prepared statement of Mr. William Melton can be found on
page 143 in the appendix.]
Chairman Castle. Thank you very much, Mr. Melton. We appre-
ciate your testimony.
Next, we have Ms. Fisher, who is the Executive Vice President
of Visa USA. I see some Visa cards up here, so maybe we will learn
what they are all about.
STATEMENT OF ROSALIND L. FISHER, EXECUTIVE VICE
PRESIDENT, VISA U.S.A.
Ms. Fisher. Thank you, Mr. Chairman. I speak to you on behalf
of Visa and its thousands of regulated member financial institu-
tions. Visa is an association that is owned by these institutions.
Visa banks issue more than 400 million Visa cards around the
world. They are accepted at more than 13 million merchant loca-
tions. Last year. Visa itself processed more than $630 billion in
transactions.
While there has been much press attention recently to so-called
electronic money and the role of a host of new entrants into the
payment services business, I am proud to say that Visa, and most
importantly, its member financial institutions, are playing and
must continue to play a central role in the introduction and use of
these new electronic consumer payment services. I say central role
for two different but equally compelling reasons.
First, Visa and its member banks have a solid track record of de-
veloping an array of payment services that meet consumer needs,
and we are confident of our ability to continue to do so.
Second, the integrity of the payment system and public con-
fidence in it could be at risk if so-called electronic money becomes
nothing more than zeroes and ones, digital signals, without the
backing and central involvement of regulated financial institutions.
To the first point, the success of Visa's existing products is well
known. Visa and its members offer many credit card options, such
as the Visa Classic and Visa Gold for individuals and other credit
card products specifically tailored for businesses.
Visa also offers the Visa Check Card, an off-line debit card, and
Interlink, an on-line debit card. Debit cards, as you probably are
aware, access a deposit or share draft account. Visa Travel Money
is a prepaid card for obtaining local currency worldwide at favor-
able exchange rates, and Visa Travelers Cheques. Visa also runs
the largest global ATM network under the Plus brand, as well as
13
an automated clearinghouse service and an electronic check imag-
ing service.
The second reason Visa and its members must be involved in
these evolving services has a public policy foundation. The integrity
of the payment system and public confidence in it demands that
regulated financial institutions be central players. On the other
hand, we caution that premature government regulation or the fail-
ure to modify existing regulations to accommodate evolving tech-
nologies could chill or halt the delivery of new financial products
to consumers.
I will comment further on this important issue in a moment, but
first, let me give you a closer look at some Visa products about to
be launched.
Payment cards embedded with microprocessor chips are often re-
ferred to as smart cards. Visa's first application of this chip tech-
nology is a stored value card that we call Visa Cash. This card is
prepaid, with a specific amount of value loaded on to the microchip.
It is an alternative to cash for consumers making small purchases,
usually those under $20. We believe there is significant consumer
demand for Visa Cash and it will be introduced in the Southeast
later this year and showcased during the 1996 Summer Olympic
Games in Atlanta.
You can imagine the convenience of driving to a Washington,
DC, Metro station and not having to dig in the glove compartment
for the exact change to put in the parking meter, meanwhile stop-
ping to buy a copy of the Post on your way to the office. All of this
can be done with the stored value card.
Remote banking is a term that is used to refer to the ability of
consumers to communicate electronically with a bank in order to
access a wide variety of banking services. Ultimately, it is the con-
sumers who will decide and choose the preferred way to do busi-
ness with their financial services provider.
For this reason, Visa's remote banking subsidiary, Visa Inter-
active, already offers or is developing interfaces to almost every ac-
cess device imaginable. This will allow consumers to communicate
via touch tone phone, via screen phone — and we have one over on
the table to your left — via personal computer, via personal digital
assistant, or via interactive television. Visa will provide a myriad
of options for member financial institutions to offer their cus-
tomers.
Let me turn to electronic commerce, buying goods and services
over computer networks that can be open, such as the Internet, or
closed, such as commercial services. In this arena. Visa's first prior-
ity is to ensure that Visa card payments made over open networks
such as the Internet are secure. This means that the transmission
of the card holder's payment data must be protected from snooping
by others on the network, that the merchant and the consumer are
assured that each is a valid, permitted user of the Visa system, and
that, in the end, the merchant will be properly paid and the
consumer billed.
Accordingly, Visa has worked with Microsoft to build a standard
for secured transactions in an open network. This will give consum-
ers and merchants the confidence and protection they need to use
this new purchasing medium.
14
Public confidence in Visa's member financial institutions and the
payment services they provide is high, and there is good reason
why this is so. They are regulated by the Federal banking agencies
and are subject to regular examination by those agencies and State
supervisors. Customers' ftinds are protected by the safety net of
Federal deposit insurance. A high degree of public confidence in
our members, as well as in their products and services, is essential
for economic stability and growth.
Some electronic payment services may be offered through entities
that are not subject to the same supervision and regulation as
Visa's members. To the extent that these entities enjoy an unfair
competitive advantage, they may worsen the disintermediation of
traditional depositories.
For these and other reasons, the subcommittee should know that
a recent report by the European Union Payment Systems Working
Group proposed that only banks be allowed to issue stored value
cards. Visa agrees that only depository institutions or their affili-
ates should be permitted to issue open system stored value cards,
in contrast to single use or closed system cards, such as those used
in the Washington Metro.
Policy makers must be alert to the potential economic con-
sequences from a loss of public confidence in cards issued by
unregulated, uninsured companies. Law enforcement officials com-
bating criminal activity such as tax evasion, counterfeiting, and
money laundering should consider the consequences of stored value
card systems that, unlike Visa's, may not generate a well-defined
audit trail or whose record keeping is not subject to regulatory
examination.
At the same time, government must guard against regulation
that would stifle innovation. The potential application of the Elec-
tronic Funds Transfer Act and Regulation E to stored value cards
is an excellent example. Regulation E requires that consumers get
paper receipts for electronic funds transfers, such as ATM trans-
actions. If applied to stored value cards, the product will fail.
Some of the most practical applications of the card will be at
vending machines, parking meters, and other locales geared to
small dollar transactions. Stored value cards simply will not be eco-
nomically feasible if vending machines and parking meters must be
reengineered to provide a paper receipt for a 75-cent Coke or 30
minutes of parking time.
Also, keep in mind that one need not have a banking relationship
to get a stored value card, that the card issuer may not know the
buyer's name and address, and that the value on the card may be
used quickly. In this setting, the periodic statement requirements
of Regulation E are totally impractical. These cards will be sold at
a variety of locations, including dispensing machines, such as those
used to dispense Metro farecards for the DC. transit system, and
it is not economically feasible to equip these machines to collect,
store, and transmit all the personal information needed to comply
with the periodic statement requirements of Regulation E.
These are only a few examples of how product development, if
shaped by regulation rather than by market forces, would be stunt-
ed. Other countries have encouraged innovation by letting products
take shape without undue governmental interference. In order to
15
encourage development and to create an environment in which the
United States can assume a leadership role in these endeavors, we
need to do the same. We urge Congress to avoid adding to the regu-
latory burden of depository institutions and permit the public to
enjoy the benefits of new products and services that Visa and its
members are bringing to market.
One final thing. You have on the table in front of vou two cards.
One of them is a stored value card, and you are welcome to, after
the hearing is over, to come down and use it on the vending ma-
chine. David will show you how it works. Basically, there is $20 of
value stored on your card. When he puts it in there, it tells him
how much he has left. Select the items, and you can have your fa-
vorite snack.
Chairman Castle. Do we get to keep those items? [Laughter.]
Ms. Fisher. The other card is a prototype of a chip card that ac-
tually has writable storage on it. It is a more advanced version of
the chip card that we anticipate coming out in the near future.
Once again, thank you for the opportunity to testify.
[The prepared statement of Ms. Rosalind Fisher can be found on
page 146 in the appendix.]
Chairman Castle. Mr. Flake has asked me if that is above the
gift limit, whatever is on that card. You have to worry about these
things in Congress. [Laughter.]
We appreciate your testimony, Ms. Fisher, and look forward to
demonstrations at a later time. I have had problems with that type
of machine not quite dispensing an item. Will you be able to help
with that problem? [Laughter.]
Next we have Heidi Goff, who is a Senior Vice President of
MasterCard International. Heaven forbid we would ever have Visa
without MasterCard here, so we have you next to each other.
[Laughter.]
Ms. Goff, we look forward to your testimony.
STATEMENT OF HEIDI GOFF, SENIOR VICE PRESIDENT,
MASTERCARD INTERNATIONAL, INC.
Ms. Goff. Mr. Chairman, members of the subcommittee, nry
name is Heidi Goff and I thank you for the opportunity to testify
today. I am the Senior Vice President for Global Point of Inter-
action for MasterCard. You probably have never met someone
whose title is "Global Point of Interaction" before. It is a new title
to me as well, and it makes sense only in the brave new world de-
scribed by my colleagues on this distinguished panel.
Until very recently, we expected financial transactions to take
place at a certain point of sale, usually in a store, and increasingly
over the telephone. The point or place of business was usually dic-
tated by the merchant or service provider. However, in the point-
of-interaction world, the sale takes place wherever the consumer
wants it to — over the phone, via the Internet, from an interactive
television, at a kiosk located in an airport, even the old fashioned
way, at a department store.
My job is to help this point of interaction to be wherever and
whenever convenient for the consumer, providing consumers with
a degree of control and financial empowerment never before experi-
enced anywhere in the world. We are undergoing an unprecedented
16
convergence of exciting technologies, which, until recently, resided
only in the realm of science fiction.
What I want to do this morning is to leave you with a flavor for
the scope of change we are anticipating, the potential benefits for
consumers, and the importance for government policies which nur-
ture the development of new era products that empower consum-
ers.
The forces for change include technology advances in communica-
tions, integrated circuits, image processing, data storage, and artifi-
cial intelligence. Telecommunications are faster and more ubiq-
uitous. Integrated circuits are finding their way onto transaction
cards throughout the world, vastly increasing the ability to provide
payment services in a secure manner.
In addition to the storefront on main street, merchants have mi-
grated from catalog and telephone sales to electronic storefronts on
information networks, such as America On-Line and CompuServe,
and they are on the Internet. Consumers now browse through prod-
uct images at their convenience, in their homes, making purchas-
ing decisions with maximum information and no pressure.
Changing consumer behavior is having a profound effect on how
transactions are made. Consumer research tells us that time is one
of our most highly valued commodities. For the payments business,
that means giving consumers the services and access they want
wherever and whenever they want it.
At the same time, people are becoming increasingly comfortable
with technology. Almost half of the U.S. households have comput-
ers, and as prices come down, those numbers will go up. Just look
at the increase in the use of remote delivery methods, such as
ATMs and cash dispensers. A recent study found that 77 percent
of all U.S. households use remote delivery for at least part of their
banking. The younger the consumer, the greater the tendency not
to go to a teller. Right now, technology-driven transactions account
for more than half of all banking transactions.
As I mentioned, new technology is now enabling new payment
methodologies, such as stored value or prepaid cards, as well as
new security measures which will protect consumers from more so-
phisticated criminals. Smart cards will improve the way we make
payments and create new value for the consumer and the banking
community.
Since a smart card has greater storage capacity than today's
magnetic stripe technology, the card can support multiple
functionalities. In other words, it can be a credit card, a debit card,
and a stored value card wrapped into one. It can also store other
information, such as frequent flyer or loyalty program points or dis-
count coupons. The consumer will decide what information is
stored on the card, what functionalities it will contain.
Stored value cards will allow merchants to accept card payments
without the expense of maintaining on-line connections to issuers.
Once the card is validated, the cash value is deducted from the
card and the consumer can load more cash onto their cards as
needed from an ATM, and ultimately from a telephone, almost any-
where they happen to be. The loyalty programs and coupons main-
tained on chip cards have endless possibilities for merchants to
17
give discounted goods and services instantly at the time of each
transaction.
The smart card can also offer consumers greater security. By en-
coding the card with a personal identification number, a merchant
terminal can verify the card holder without ever going on-line. The
card holder simply inputs his or her PIN, the card and terminal
interact to authenticate the PIN using secure cryptology, and if the
PIN is correct, the card is accepted. Through unique card authen-
tication methodology, the terminal also will validate that the card
is authentic, not counterfeit.
MasterCard, Visa, and Europay have been working together to
develop a single global standard for smart cards and the terminals
that accept them. We want to be sure that, just like today's credit
cards, any terminal will be able to accept any card. Our progress
has been impressive. Already, specifications for cards and termi-
nals have been developed.
While chip technology will add greater flexibility to payment
cards, increased connectivity is giving consumers broader accept-
ance for those cards. As a result, the point of sale, a physical place
defined by the merchant's location, is migrating to a point of inter-
action, a virtual place defined by the consumer's location.
There are two pieces to the connectivity equation, expanded net-
works and a growing number of on-line services. By networks, I am
talking about the physical connections rather than services. Three
of the most commonly recognized are telephone networks, cable
networks, and satellite services. Each of these networks offers a po-
tential path for carrying value transactions. Consumers can do
their banking by phone. In some places, they can bank on their tel-
evision screens.
The bottom line is that the availability of these expanded net-
works increases our ability to serve more consumers efficiently and
effectively.
On-line services are the other half of the equation. While there
are more ways to hook in, there are more things to hook to. The
electronic superhighway is expanding exponentially. Every day,
new services become available and every day the traffic becomes
heavier. More than 25,000 merchants in 150 countries are already
on the Internet and it serves 20 million users right now. By the
year 2,000, we expect it to be more than 100 million. It is safe to
predict that, in the future, anyone who has anything to sell will be
connected to it, as well.
One important role for the payments industry will be ensuring
that those value transactions are secure. Right now, with few ex-
ceptions, if you send your account information across the Internet,
you may be leaving yourself vulnerable because those transactions
are conducted on unsecured lines. MasterCard, together with Visa,
has been working to ensure that on-line transactions can be made
securely, and by year end, that will be a reality.
We are also acutely aware that many consumers feel that the
greater access to information raises concerns about conbumer pri-
vacy. Last year, we joined with Yankelovich Partners to assess the
privacy concerns of today's consumers. We also looked at the poten-
tial for using personal data for better fraud protection and im-
proved consumer satisfaction. We recognize that if consumers do
18
not trust us to protect their privacy, they are not going to use our
product. The bottom line is, consumer trust is key to our continued
success.
Finally, we appreciate that Congress has an equally significant
role to play in ensuring that the consumer receives the value we
are promising, the broadest range of products and services, unsur-
passed acceptance at all points of interaction, and top-quality cus-
tomer service and security, no matter where the card holder is. As
new financial services and products are developed, we look forward
to continuing to work with legislators and regulators who have
oversight responsibilities.
Without question, though, we will be consistent in our message
to you. That is, nothing would do more to prevent our ability to
make good on this commitment than premature regulations. We
urge this subcommittee to continue its efforts to study the products
and services we are discussing and to play a leadership role in
guiding Congress to be a partner in development.
Thank you again for the opportunity to introduce you to our view
on points of interaction. We look forward to working with you to
create a future that ".erves the best interests of both consumers and
American financial institutions.
[The prepared statement of Ms. Heidi Goff can be found on page
163 in the appendix.]
Chairman Castle. Thank you very much, Ms. Goff. We appre-
ciate your fine testimony.
Our clean-up hitter, at this hearing, at least, is Mr. Scott Cook,
who is the Chairman of Intuit, Inc., and as I have already indi-
cated, the owner and developer of Quicken, which is, of course, a
business system that many, many people use already. Mr. Cook, we
look forward to your testimony.
STATEMENT OF SCOTT COOK, CHAIRMAN, INTUIT, INC.
Mr. Cook. Thank you. Mr. Chairman and members of the sub-
committee, I want to thank you for the opportunity to speak this
morning. Let me begin with an orientation to electronic commerce.
Intuit is involved in an entirely different part of electronic com-
merce than some of today's panelists. For example, some companies
are focused on creating new payment systems. Some companies are
focused on allowing people to purchase goods electronically. Intuit's
focus is different. Our focus is on providing people and small busi-
nesses with PC technologies to help them make better financial de-
cisions. We are not creating new kinds of money.
If you know my company at all, you probably know us for our
first and flagship product, which has been mentioned. Quicken,
which is the world's most widely used personal finance software. In
fact, it is the Nation's best-selling software application program.
However, Quicken is just one of our products that we make to
achieve our goal of improving the financial lives of consumers and
small businesses by helping them make better financial decisions.
The others include the Quicken Financial Planner, which is the
Nation's best-selling financial planning software; TurboTax and
Maclntax, which are the Nation's best-selling software products
that help you file your income taxes; the Parents Guide to Money,
which is software that helps parents with the four important finan-
19
cial decisions they make, on life insurance, health insurance, child
care, and college savings; and the Quicken Mutual Fund Selector,
which gives consumers unbiased information to decide which of
thousands of mutual funds meet their objectives.
Also, for small businesses, we make QuickBooks, the Nation's
leading-selling accounting software, and QuickPay, the Nation's
leading-selling payroll software.
We also proudly export American technology. To date, our prod-
ucts are the best sellers in every country that we have entered.
Let me demonstrate what I mean by enabling people to make
simply smarter financial decisions. Let us look at one example, re-
tirement planning. We all know that structural changes in pension
and Social Security benefits have moved the burden of funding
one's retirement onto the consumer's shoulders. Yet, when I speak
publicly, I ask audiences sometimes whether thev have in place a
retirement plan that they know will take care of them when they
retire. Stunningly, only 5 percent of the audiences I speak to raise
their hands, and that is a national tragedy in the making.
Millions of working Americans will retire in poverty, not in pros-
perity, unless they put a retirement plan in place in the next few
years, yet only 5 percent have done so. Why do they not? Because
financial planning is just too complex for consumers to do unaided,
and truly unbiased financial advisers are so expensive that only
the very rich can afford them.
We at Intuit are trying to change this with software we just in-
troduced this spring, called the Quicken Financial Planner. It de-
livers an unbiased retirement plan, personalized to each consum-
er's specific situation. What I would like to do is demonstrate brief-
ly how that operates.
What we found out was people just do not know how to begin,
nor do they know the steps to go tnrough to do a retirement plan,
so we have built this in a step-by-step fashion. In fact, that is the
headline here, confident retirement planning step by step. All the
user need do is hit the next button down here and answer the
questions that appear. This first screen describes the process. This
next screen details the specific steps the customer will go through.
I will hit the next button to continue.
The first step is entering personal information. I will hit the next
button again, and up pop the first questions, the customer's name,
birth date, and desired retirement age. Hit the next button again
and questions come up on health and other matters to help begin
estimating life expectancy. So in this process, the customer goes
through the product.
Whereas these questions are fairly easy, some questions are
more challenging. I am going to jump ahead here to the taxes and
inflation section. Here we need a place for the customer to enter
what the rate of inflation is, in case it should change. However, if
you ask anyone to estimate the rate of inflation for the next 50
years, they are not going to be able to answer that question, so
what we do is work with noted financial experts, in this case, Jane
Bryant Quinn, who actually suggests 4 percent as currently the
best rate to use.
But then if a customer ever has a question, the user can just
click the "expert" button, as I just did, and what pops up is not dry
20
text on financial matters but, in fact, what pops up is Jane Bryant
Quinn herself.
[Audio of Ms. Quinn was played.]
Unlike real experts, you can turn them off. [Laughter.]
In this way, the customer can go through answering questions
about their assets, their loans, their income, expenses, their retire-
ment benefits. I will jump ahead to results, where the customer can
see their financial picture from now through their expected death,
in this case, their income. You can click on expenses here and see
expenses. This bulge here is the college expenses of their children.
You can go out and click on portfolio, and here we can see one's
investable assets. Here, you can see in this customer's case, there
is a problem. The money runs out before they do. That is why up
top here we say, your plan fails, but you have assets you can sell.
Namely, you have a house you can sell.
But we do not leave the customer hanging there. Instead, I will
hit the next button a couple times and get to a "what if area,
where this shows that I have 79 percent of my retirement funded
and I can now play with the fundamental assumptions to see what
it will take to sufficiently fund my entire retirement. So I can try
to save some more and then recalculate and see, no, that does not
do it. Let me save a little bit more. No, that does not do it. IVIaybe
I should retire a little bit later. Let us go up here to maybe 63, and
now recalculate, and boom, now I have a plan which will suffi-
ciently fund my retirement.
This is the kind of work that we believe will make dramatic im-
provements in people's preparedness for retirement. This product
costs $39, which makes financial planning available beyond just
the richest 3 percent of households, and, in fact, puts it within easy
reach of the 30 percent of American households who now have PCs.
That is a tenfold expansion in availability.
Mr. Chairman, just a few days ago, my company announced an-
other move that we are making to enhance people's ability to make
better financial decisions, and this is by giving them a communica-
tion link to their bank that will facilitate the delivery of rich finan-
cial information in an automatic fashion.
We are working with 17 of America's largest and most trusted
banks, plus American Express and Smith Barney, to connect them
electronically to Quicken users. This work is based on a simple
premise, that customers and financial institutions both seek closer
and deeper relationships with each other. I have not met a banker
yet who did not want closer relationships with their customers.
Similarly, customers want to be able to deal with their bank when-
ever the customer wants, including weekends and nights.
What we are building is a method of communication that will en-
able that to happen, that will enable banks to be able to reach and
serve their customers in the convenience of the customer's home or
offices whenever the customer wants, 24 hours a day, 7 days a
week.
The financial institutions benefit by cementing relationships with
their current customers, as well as finding ways to gain new ones.
Longer term, there will be some nice cost implications. Ultimately,
the cost of electronic commerce is built upon the fundamental cost
21
of silicon and of software, two cost elements which go down and
have been going down for years.
Such a trend can only help banks become more competitive in a
financial services market that is truly global, and this is good news
for the American economy and for your constituents, whose taxes
guarantee bank deposits.
Keep in mind that electronic commerce has many suppliers. Elec-
tronic commerce will be a lot like magazines or radio stations,
where there are dozens or hundreds of competing interests.
One last point about electronic commerce is that there are other
benefits here, as well. With software like ours, people will be able
to achieve their financial goals better than they have in the past.
Thus, people will avoid some of the problems that sometimes they
run into in their finances. There will be fewer bad debts, fewer per-
sonal bankruptcies, and a higher savings rate here in the United
States. This is our mission and what we and our financial institu-
tion partners are committed to.
Finally, Mr. Chairman, I have not come here today to seek any
action. I am here to provide you with information. However, to the
extent you move forward in this area, I would ask you to consider
that there are many excellent rules already in place to protect con-
sumers and ensure a strong banking industry. Many of those rules
were written before PCs and some of them might need to be up-
dated to reflect what PC-owning consumers want.
Thank you, Mr. Chairman, and with that, I will be glad to re-
spond to any questions that you or other Members of the sub-
committee may have.
[The prepared statement of Mr. Scott Cook can be found on page
168 in the appendix.]
Chairman Castle. Thank you very much, Mr. Cook. That was an
interesting demonstration of electronic commerce.
A lot of this is new to me, and I am probably fairly safe in saying
new to many members of the subcommittee, if not all members of
the subcommittee. We appreciate all of you coming forward. We do
think that this is an important area for us to examine.
Let me just briefly, before I go to the questioning, just say that
we, as I indicated in my opening, will be having another hearing,
probably in September, at which we are going to have our govern-
ment officials here to tell us about their concerns. Actually, a lot
of you did speak about security — I may ask a question about that —
which I thought was interesting, because we do have that concern.
As Mr. Cook has said, many of these rules are probably valid but
maybe need to be updated because of the use of PCs and electronic
commerce and areas that we have not used heretofore.
For the format of the questioning, for the members of the sub-
committee, as I have already mentioned to the witnesses, we will
have our usual 5-minute rule of questioning. I realize when you
have six people, one question can be destructive of a Member's
time, so I have asked the witnesses if they could hopefully have not
more than two answer any particular question so you can ask other
questions. If the members of the subcommittee wish to cut it off
and get to another question, please politely try to do so, and I hope
the witnesses will understand we have a limited time.
22
If we get through a round of questions and there is still interest
and time and you can still be here, perhaps we will have time to
go through a second round, but I want to make sure everybody has
an opportunity.
I just wrote some notes down as we went along and I will just
start. These are general questions as opposed to specifics of any of
you, but I just wanted to put some of these forward.
My first question is, will the things that we have talked about
here today, electronic commerce in general, stored value cards,
using the Internet to do transactions, complement or replace the
existing banking and purchasing systems we have over some period
of time? It seems to me that the timeframe for these kinds of
things is never very predictable. It is sort of like the inflation rate
that was mentioned earlier. It is very hard to say if, in 5 years,
we will all be using our computers to do this or it is going to be
10, 15, or 20 years, so I am interested in that length of time that
may go into it.
Just how soon the future is going to arrive, I guess is the ques-
tion which I have. I know that is a very broad question. I know
it is not quite predictable, but if any of you want to take a stab
at it, I would be interested in hearing your views on the timeliness
of all of this.
I did not think you would be this shy, not this group.
Ms. Fisher. I will take a shot at it. Mr. Chairman, I think, first
of all, to your question about whether it is complementary or re-
placement in terms of the new technologies, clearly, we are in a
complementary phase now where we are evolving to the new world
as we maintain and continue to have products and services that
are based on the foundations that we have put together.
In Visa, working with our member banks, we have in place a
very fine payment system that, in fact, is accountable and has sys-
tems in place that do the kinds of work we need to do to consum-
mate payments.
In terms of how soon will the future arrive, to a large extent, the
marketplace will dictate that, and that depends on how consumers
react to the products, and frankly, this group, Congress, has some-
thing to say about that in terms of how much we regulate or do
not regulate. But I think if the market is allowed to evolve and
consumers can choose to accept the products as they arrive, then
we will see it move more quickly.
Chairman Castle. Thank you.
Heidi Goflf mentioned that half the households, I believe, have
computers, and 77 percent, did you say, use electronic banking?
Ms. GoFF. Seventy-seven percent of the households use electronic
means of banking, such as ATMs and remote delivery. That is from
a BAI study from 1994.
Chairman Castle. Right.
Ms. GoFF. Then I also mentioned that almost half of the house-
holds, although Scott said 30 percent have — I am sure we each
have a way of counting. We do have some research that would sug-
gest that it is coming close to 50 percent and that people will con-
tinue to use the methodologies to conduct their finances. We expect
it to be — I would agree with everything Roz said. We would expect
23
these payments to be evolutionary and to be part of the infrastruc-
ture that the banking system has already created.
Chairman Castle. Let me ask you maybe a follow-up to that.
What about that portion of our population which either cannot af-
ford to plug into these systems, if a computer is going to be an ele-
ment of it, or because of other limitations or just, perhaps, blocks
of their own, such as perhaps I have in using computers, whatever
it may be, either cannot afford or choose not to use these services.
I assume we are not devising a system that would completely aban-
don the kind of hand system that we have today, inefficient as it
may be.
Ms. GoFF. Absolutely not. I think that, just like credit cards 25
years ago were for the privileged few, today credit cards are rather
an expected convenience in the American society. Debit cards, ATM
cards now provide electronic access to deposited funds. And stored
value cards are really a form of cash. They will not be restricted
to people who have depository accounts or who have credit card ac-
counts. They are really products that can be used by anybody in
the society.
Chairman Castle. Let me ask one more question. What is the
cost of a simple transaction, like the acquisition of this incredible
flashlight which I demonstrated earlier, as compared to, for in-
stance, having called them and given them either your Visa or
MasterCard number and gotten it through the mail that way? Are
the costs roughly the same, and who bears these costs, or is it more
expensive?
Mr. Melton. Obviously, the answer is different, depending on
several situations. But in that specific situation, which I do know
something about, the cost when the systems all get into place will
be dramatically cheaper doing it that way. A lot of the risk goes
out of the system. If you were to call today over the telephone and
give your information in the open, the merchant would have a
higher discount rate than if you were in front of him face to face.
With the new systems that Visa and MasterCard are now design-
ing and putting into place, a lot of the risk goes out and they will
be able to make the cost over the Internet as cheap or cheaper than
a face-to-face transaction.
Chairman Castle. Let me ask one final question, and that is
this whole issue of fraud and security. All of you were very careful,
or practically all of you, were very careful to mention the various
safety nets that are built into it and, indeed, talked about dealing
with banking institutions and electronic commerce and expressions
such as that, which is all well and good.
But we all know that every time some system is created that in-
volves money, there are pirates out there immediately trying to de-
vise some way of getting around it. It seems to me that we have
read about the great computer glitches in the past, which is a
whole other issue that we have to worry about. I worry about the
pirates. I worry about fraud.
I trust, if it was up to all of the operations of the various entities
you represent, this probably would not be a problem because you
have been in existence for some time. You are the pioneers; you
have developed these things. But I am worried about the next
24
group who is sitting at home, who is a hacker someplace trying to
figure out some way to rip off these systems.
This is obviously the subject of a later hearing which we are
going to have, but I would be interested in your views on this, not
from your own systems but from what we are going to have to do
to monitor the changes to the use of electronic currency and what
the government should be doing with respect to making absolutely
sure that we are not going to have dramatic runs that could not
be expected in banking today or other priority transactions which
would be a problem, if any of you have given any thought to that.
Mr. Chaum. I think it is a new medium. Just like the answer to
your first question, probably there will be an enormous explosion
in commerce on the information superhighway because it makes a
tremendous lot more goods and services available to people much
more easily. It will create whole new markets. It is not really a
matter of evolution.
Similarly, since it is a new medium, there will also be new
vulnerabilities, but on the other side, there will be much better pro-
tection than we are accustomed to in many cases. So it is different.
That is my personal view.
Chairman Castle. Thank you.
Let us, if we can, turn to Mr. Flake, who is the ranking minority
Member on the subcommittee. He has been a wonderful gentleman
to work with and, I am sure, has questions for you.
Mr. Flake, Thank you very much, Mr. Chairman.
I do have an opening statement which I would like to submit for
the record.
[The prepared statement of Hon. Floyd H. Flake can be found on
page 48 in the appendix.]
I onlv regret that, since I did not have breakfast, you did not
take a oreak between the testimony and questions so that we could
go over and have our snack. [Laughter.]
Nevertheless, the question that I have has to do with the fact,
Mr. Chairman, that we have had hearings here regarding whether
or not we ought to convert the paper dollar to coins. Here we are
today with the subcommittee that is far beyond, it would appear
to me, any discussion about paper or coins.
I just wonder if the subcommittee might have a reaction, given
that it seems as if by the time we make the decision which direc-
tion to go with this, coins or paper will be so archaic and out of
use that we will have expended millions and millions of dollars to
create coins, if we use coins in place of the dollar bill, that will not
have any uses. You cannot use them in the laundromat. You can-
not use them to buy snacks.
Can I get an opinion from someone in terms of that? I know this
is not the hearing for that, but I think it is important to have on
the record some sense from persons who are involved in what I
consider to be the next phase of the evolution to whatever kind of
monetary practices we are going to have operative in the future.
Mr. Chaum. I would like to say one thing, just based on the Eu-
ropean perspective, very briefly. I have been involved with the Eu-
ropean Commission study of how to replace national currencies by
an ECU, and we have done a lot of consumer surveys. People are
very happy to have an electronic ECU and it is an enormously cost-
25
ly process, as you can imagine, to switch physical currencies and
to manufacture them. It is also very time consuming. So an elec-
tronic ECU has a lot of appeal. It probably can be more secure,
more cost effective, and still retain the same privacy that people
are accustomed to with cash.
Mr. Flake. So in your opinion, or in anyone's opinion, does it
make sense for us to even give major consiaeration to the thought
of changing the paper dollar to coins, or is that an archaic discus-
sion already?
Mr. Cook. Mr. Flake, I cannot speak to the merits of the issue
of coin versus paper but I can say that my expectation is that phys-
ical currency will be with us for the rest of our lives.
Mr. FI.AKE. OK.
Mr. Cook. Certainly e-mail, for example, is a wonderful inven-
tion, but the U.S. Mail is still here and is as popular as ever. Cer-
tainly new forms of transportation have been invented, but old
forms still exist.
The consumer habits change very slowly. Do not get caught up
in the PR hype in the press. This stuff is interesting. It will be pop-
ular, but it will not replace the existing means that are known and
trusted, and in my view, it will not replace them in our lifetimes.
Mr. Flake. Thank you.
Mr. Cook. It is a nice complement. It is not a replacement.
Mr. FlAKE. It will not replace it.
Mr. Van Lear. Mr. Flake?
Mr. FiAKE. Yes.
Mr. Van Lear. I would like to just add that we have been talking
about a paperless society for the last 25 years and checks have
been predicted to be out of our society 10 years ago. They are cur-
rently still growing, at a relatively slow rate, but they will continue
to be with us for that period of time, as well.
So I think the ability to move consumer behavior, particularly as
it relates to payment system mechanisms, is a very slow process.
ATMs took 25 years to mature in this environment to the point
that people are comfortable using them now, not only to take
money out but to put money in.
Mr. Flake. Thank you.
Presently with cash, once a transaction is completed, it is vir-
tually impossible to trace who made the purchase. Many Americans
value this anonymity when conducting their business. This tech-
nology has the possibility of tracking people and keeping complete
records of their purchases. This is a plus when it comes to servicing
an underground criminal economy but can definitely encroach on
the privacy of law-abiding citizens.
My question is, will stored value cards keep financial trans-
actions anonymous or is this an area of concern that we in the Con-
gress ought to be addressing?
Mr. Chaum. I would like to respond to that briefly. This is a card
which does provide perfect anonymity for low-value payments.
There are also many who offer what I call pseudo-solutions to this
problem, and they suggest that if one is able to buy a card without
having to identify one's self, then this provides a kind of privacy.
This is a false and bogus argument simply because the card identi-
26
fies itself in every transaction and all those transactions can be
linked and collected together.
So when you use a French phone card, your name is not on it,
you did not identify yourself when you bought it, but someone can
go through the data base of all the phone calls that are made and
find all the calls that were made with that card, perhaps trace that
to your home phone or your office, and in that way associate a par-
ticular card with you. Then it is even worse than if your name were
written plainly on the card, because people have the false sense of
security that their anonymity or their privacy is protected whereas,
in fact, it is not at all.
Mr. Flake, I would just ask the Chairman for unanimous con-
sent for 30 seconds. Can you define for me perfect anonymity? How
do you determine that a card has perfect anonymity versus another
card that would not have that definition?
Mr. Chaum. This is the subject of the Scientific American article,
which I think I have made available to all of you. The essential
idea is that some cards reveal identifying information as an intrin-
sic part of their security mechanism. In fact, most of the techniques
which you have heard about here from my colleagues are of that
type.
There is another type, a second type, which is fundamentally dif-
ferent, which simply does not reveal identifying information in the
process of making a transaction. That is what I have called privacy
technology in my presentation. We have developed it for the Euro-
pean Commission. We developed it for automatic road tolls, for
e-cash on the Internet, and so forth. It is a very versatile and very
competitive technology.
It just depends on what you want to do. Do you want to build
a system that basically undoes the kind of freedoms that are the
basis for our society? There have been a number of think tank re-
ports that come out of Washington that suggest that the best way
to turn this into a police state would be to use identification-based
payment and outlaw currency, bank notes, and coins. There are
studies to that effect.
Do you want to do that, or do you want to allow the electronic
medium to give us preservation of the level of privacy that people
expect to have today? What we have shown is that technologically,
that is certainly feasible. It does not cost more and it can be done.
But left to their own devices, at the moment, the financial services
industry has not really adopted this approach and what they are
building is something that will give them more and more detailed
information about people's activities. I think those are the two dif-
ferent approaches that I alluded to in my presentation, that I said
were really fundamental to the things that this country stands for.
[The Scientific American article referred to by Mr. David Chaum
can be found on page 137 in the appendix.]
Mr. Flake. My time is expired. Thank you, Mr. Chairman.
Chairman Castle. Thank you, Mr. Flake.
Mr. Royce.
Mr. Royce. Thank you, Mr. Chairman.
I have an opening statement which I would like to insert into the
record.
27
[The prepared statement of Hon. Edward Royce can be found on
page 52 in the appendix.]
Mr. Royce. I guess there are two sHghtly contradictory observa-
tions that you have made here today. One is that e-cash or digital
money would best be shaped by market forces rather than reg^ila-
tion, that we should have as little regulatory burden as possible,
and Ms. Fisher suggested two areas where we could pull back that
burden.
At the same time, each of you have said that we need safety and
soundness and a high degree of trust, and therefore a high aegree
of government control over this emerging process, with the excep-
tion of Ms. Fisher, who has suggested that we could use backing
of regulated financial institutions in place of that evolution. Mr.
Van Lear, I think, said that the role of government is to protect
against systemic risk, or that was Dr. Chaum.
So the basic assessment here is that it is government control of
the emerging system that you are going to rely upon for that meas-
ure of safety and soundness. What I would argue, for you to think
about, is that in the Western world, governments routinely debase
their currency. Governments do a very bad job of managing the
value of the currency.
If you look at the boom-bust economic cycle and the millions
wiped out every time we go down on the down-side of liquidation,
if you look at the problems with infiation and the fact that a nickel
today is worth a fraction of what it was a couple generations ago,
and if we look to the future with a $5 trillion debt here in this
country, to give just one example, and try to imagine what is going
to happen if that debt is monetized in the future.
In terms of the problems with counterfeiting that has been point-
ed out today, if you look at the counterfeiting problems that we
have with the U.S. dollar right now in Eastern Europe in the Inde-
pendent States, that is a problem of incredible magnitude right
now in terms of counterfeiting of $100 U.S. bills.
So all of these problems already exist, and I guess I was looking
at it from the opposite perspective. I was in the hope that the evo-
lution of digital money might bring pressure to bear on the existing
monetary system to encourage an end to this debasement of the
currency and that somehow the evolution of a new system would
encourage and leverage for a stable unit of exchange.
If any of you would like to make comment on, 20 years down the
road, a generation from now, where might we be, could this lever-
age for such a stable monetary unit in international exchange?
Mr. Cook. Mr. Royce, let me just address the opening of your
question about the panelists seeming to be in agreement requesting
more regulation in this nascent area. I did not talk much about
regulation, so let me make my point of view clear. I do not believe
this is a place that will be aided by a host of new regulations or
legislation. It is so nascent, so at the beginning, it is so hard to de-
termine what consumers really want and in which direction it is
going to go.
I think regulation would likely stunt developments here, not help
developments, and so I do not believe that this is a fertile field for
new regulation. As I mentioned, there may be only some tuning of
existing sound regulation that was put in place before computers
28
were envisioned, which is a very different matter than additional
levels of regulation. And, in fact, I believe those sorts of changes
can largely be achieved working directly with the regulatory agen-
cies without a need for legislative involvement, and if there is a
need for that, we can get back to you.
Ms. GoFF. We would like to add to that that we would very much
like to work with the legislature and the regulators to monitor and
develop new products but that it is premature for any regulation
at this time on evolving products and services.
Mr. ROYCE. Now let me ask Ms. Fisher, if I could, it seems as
though the Federal Reserve Board will have a diminishing role in
the payment system. Do you currently compete for business with
the Fed, for instance, with your automatic clearinghouse? And with
the advent of forthcoming technologies, what will be the Fed's role
in the future?
Ms. Fisher. We do with our automated clearinghouse service
provide a private sector alternative to the Fed for ACH processing,
which I believe was a requirement, that the Fed needed to open it
up to private sector providers, and Visa did step into that breech.
I believe there are a couple of others who also provide private sec-
tor alternatives. So in that sense, yes, I guess we do compete, but
that is something that I believe Congress required, that the Fed
offer it.
Mr. RoYCE. What market share would you say you have now?
Ms. Fisher. I do not have the exact figures. I can get that to you,
but my guess is that it is something less than 25 percent.
Mr. RoYCE. Thank you.
Thank you, Mr. Chairman.
Chairman Castle. Thank you very much, Mr. Royce.
Mr. Metcalf
Mr. Metcalf. Thank you. I also have an opening statement
which I would like to insert into the record.
[The prepared statement of Hon. Jack Metcalf can be found on
page 54 in the appendix.]
This is a fascinating discussion. I am going to follow up a little
bit on Congressman Flake's excellent question.
We are all talking about how money moves or works in society.
I believe we are missing a major and fundamental point if we do
not carefully consider, how does money arise? How does it come
into being? Where does it come from? The Fed is concerned about
money supply. How does e-mail fit into money supply? The found-
ers are deeply concerned about who has the authority to create and
issue money. Jefferson and Madison, two of our most insightful
Presidents, were very concerned about this and they said, only gov-
ernment should issue money.
Is there any finite control? Who is responsible? Do you create
money?
Ms. Fisher. Let me say that the Visa approach here does not
create electronic money. The idea here is that we are trying to fa-
cilitate the use of the existing Visa products and services on mech-
anisms such as the Internet and other networks.
So we are not talking about the approach taken by some others
in the industry who are creating a new form of cash, if you will.
Rather, we are talking about using existing products that financial
29
institutions offer today but providing a safe and secure way for
those existing products to be used on new technologies, new net-
works, in the new environment.
Mr. Metcalf. Do you not monetize credit, and is that not a
money creation? I think you do. I think you do, but I may be
wrong. You go ahead.
Ms. Fisher. The Visa cards offer a form of payment, yes.
Mr. Metcalf. A form of payment?
Ms. Fisher. Is that what you were referring to, creating cash or
creating
Mr. Metcalf. Yes. Do you not monetize credit, in a sense, when
you issue a credit card and allow people to create money? Is that
not a money creation?
Ms. Fisher. I do not think so, sir.
Mr. Metcalf. Does anybody else want to try on that one? I think
this is a fundamental question. We have pretty strict — the power
to create money is an incredibly important power. If people are cre-
ating money, and you were all talking about how monev moves but
nobody is bringing up that. I guess I think that is a fundamental
question, and I think our society is at fault in not looking at that
question. Where does money come from?
Mr. Melton. I will take a swipe at a very narrow answer to that.
At least for our services and the technology tools that we provide,
in our world, we are only providing transport, but in all cases, we
are going back to working with the oanking system.
The banking system, as a whole, certainly does create money.
The banking system is highly regulated and with their minimum
requirements, then, in terms of equity base, they do make loans
and that whole process of making loans does create money, but it
is the regulated process blessed by the government.
Now, all that we are doing, and, in fact, if I may speak for the
credit card associations, all of their credit that is issued through
the cards comes out of a regulated bank and that bank is doing
through the plastic what it could just as well be doing over the tell-
er's counter or over the loan window.
Mr. Metcalf. So banks can create money, too?
Mr. Melton. Banks as part of the government franchise given
to the banks, yes.
Mr. Metcalf. I think I am getting the relationship. You are cre-
ating money, but you are doing it through a bank that is given the
power to create money, or at least took the power to create money,
whether they were really given it or not. I think this is something
we had better look at, that in particular, because the Fed creates
money, we know that. Are there any other comments on that?
Mr. Van Lear. Mr. Metcalf, the way we approach that is my
company drives ATMs. We have 18,000 ATMs that people come to
to make deposits and take out funds, and today, they do that usu-
ally with cash. They take out cash and they deposit checks.
As we move into the area of smart cards, we would expect the
consumer to be able to put a smart card into an ATM and be able
to move cash, if you will, from their account onto that card. That
card, then, can be used to facilitate transactions such as were dem-
onstrated here today through the use of a vending machine or on
a transit or other types of applications.
92-489 - 95 - 2
30
We have facilitated the transaction, but it is really no different
than if we had dispensed cash. There is no extension of credit.
They are funds that have been moved from the account into a
funds pool where they are reserved for the settlement of that trans-
action at a later date. So there is no funds creation, if you will, as
a part of the movement of funds from a demand deposit checking
account onto a smart card in the environment in which we are
operating.
Mr. Metcalf. In that case, I agree with you. When I take money
out, then I am taking out money that I had. However, if it is a
credit card, if you are going in there and borrowing money, you are
creating money, and I think the best answer to that was the one
who said, yes, we are doing that but we are doing that under the
auspices of a bank which has the power.
I do think we should look at this area very carefullv, though. Are
there any other comments? I guess my time is up. Thank you very
much.
Chairman Castle. Thank you, Mr. Metcalf. You sparked a dis-
cussion up here.
Mr. Chrysler.
Mr. Chrysler. Thank you.
Are your stored value cards equipped with a tracing mechanism
so that law enforcement, after proper use of a search warrant and
subpoenas, can track where the money came from and where it
went?
Mr. Chaum. I would like to answer that. The smart cards that
we have developed are not, and I think that is the way it should
be. If government were to insist that a low-value payment system,
as I mentioned in my testimony — I hope you were here for that —
were traceable, then that would represent an enormous erosion of
the privacy that people have today in cash payments.
There is no more exposure to society in an untraceable chip card
than there is in bank notes. In fact, I argued, and I hope it was
persuasively, that, in fact, there is less exposure in an electronic
system than in bank notes because there is no way to, for instance,
accumulate value without that being known to a financial institu-
tion.
So it is more or less trivial to make a chip card that traces every-
thing you do, every newspaper, every tram, every parking meter,
and so forth. That is easy to do. But to make a system that allows
people to have the same kinds of protections which they have an
expectation of today, it is not as simple but it can be done and it
can be done at essentially the same cost and with a very high de-
gree of security.
Mr. Chrysler. Do you think crime will fall substantially?
Mr. Chaum. No, and let me make this point very, very clear, if
I can, and that is that by making a chip card protect privacy, you
are not creating a more dangerous world than the cash that you
are replacing. It is a safer world. So it is better to move to a chip
card that has privacy in terms of abuse against society, in terms
of protection of the individual and so on.
What would be a real mistake would be to move to an electronic
payment system that is fully traceable, where you would be step-
ping backwards. You would be moving away from the kinds of pri-
31
vacy that people have an expectation of today into a totally trans-
parent world.
I do not know if you have read about the panopticon. This is
something that is devastating for the individual, and there is a
great deal of literature to support that. So this would basically, to
my view, undermine many things that this country stands for. It
would create really the kind of world which many or us have fought
to prevent.
Mr. Chrysler. I get your point. Will stored value cards be used
primarily for transactions involving small or large sums of money,
or both?
Ms. Fisher. We think that the card will be used primarily for
small dollar purchases, but obviously, consumers with their banks
will decide where it is most appropriate.
I would like to make one comment to your prior question, be-
cause the Visa stored value card product is one that is based on
our existing set of products and it is auditable and traceable.
Again, with due regard for the privacy principles that all banks
have to safeguard, if it becomes necessary, working with law en-
forcement officials to trace something, we can do that with our sys-
tem, and that is an important contrast, if you will, to what Dr.
Chaum was talking about.
Mr. Chaum. I would like to add something there. We are moving
toward a new world with Internet payments, and there, since the
transaction cost is dropping, what we are going to see is far more
finer grain payments. So what may be an acceptable amount of pri-
vacy to forfeit today may become quite unacceptable in the future.
And similarly with the chip card, the transaction cost of pay-
ments is dropping, so what people are proposing to do in many
countries is not just automatic toll payment at bridges but what is
called road pricing, where you pay for every segment of the road-
way that you use. I do not think many people would like to be fol-
lowed around in their every single move.
Mr. Chrysler. I understand that.
Mr. Chaum. Once coins and bank notes might become less
accepted
Mr. Chrysler. Your answer is consuming all of my time, if I can
just cut you off. I am sorry. I just wanted to ask one more real
quick question. At what transaction amount level will it be eco-
nomically feasible for a business to purchase the appropriate equip-
ment that will recognize these cards?
Ms. Fisher. I think that, to some degree, the cost will be deter-
mined by the level of regulation that is required. For example, if
terminals have to print paper receipts for every transaction, that
will probably not make it economically feasible at any level. So I
think that it is somewhat dependent on how the parameters of
Regulation E and the enforcement of Regulation E apply to this
product.
Mr. Chrysler. Thank you.
Chairman Castle. Thank you very much, Mr. Chrysler.
We have a vote starting in about 13 minutes. It is one vote; it
is a motion to recommit, but there may be some fmal debate and
then a final vote on a piece of legislation, so we might use some
time.
32
Perhaps we can move on to Mr. Watts' questioning and get that
in before we have to break.
Mr. Watts. Mr. Chairman, thank you.
I do not have any questions. I have an opening statement. Since
I was absent during that time, I would Hke to request that this
brief statement be admitted into the record.
[The prepared statement of Hon. J.C. Watts can be found on
page 56 in the appendix.]
Chairman Castle. Thank you, Mr. Watts.
Any member is more than welcome to submit an opening state-
ment. It will be made a part of the record if they submit it at any
time during the day.
Ms. Maloney, do you have a question?
Ms. Maloney. I would like to, if I could, put my opening state-
ment in the record.
[The prepared statement of Hon. Carolyn B. Maloney can be
found on page 57 in the appendix.]
My question is a security one. We had a great debate in an ear-
lier meeting of this subcommittee over the security of ATM cards.
What would be the security of these cards? If someone pickpocketed
you, could they then just use these cards and it would be charged
to you, or what is the technology on the security in the event of
theft?
Mr. Chaum. I believe that, as I was indicating earlier, the chip
card can be better protection for the individual than with bank
notes. Today, you can get several hundred dollars out of an ATM
machine and if someone steals it, why, it is certainly gone.
With a chip card, for example, the one that the European Com-
mission has sponsored, there is a small amount that you move to
an in-cash which can be used without the entry of a PIN code, but
then if you want to move additional funds from the reservoir into
the in-cash, then you will have to enter a PIN code.
So there is the possibility to have much better protection for the
individual. In fact, when we move to systems like this, they will
probably be much smaller and nicer, it is actually up to the individ-
ual to choose the kind of security and protection thev want. So they
may program their device to require a PIN code for every trans-
action or to use a duress PIN code to display a smaller balance
than is actually on the card, for instance.
Ms. Maloney. But currently now in ATM cards, you need a PIN
code for any withdrawal, so based on what you are saying, the PIN
code would be more security for the ATM, because you were saying
there could be a cash level before you go into a PIN card. Why is
the security greater than an ATM card? You have a PIN code now
with ATM.
Mr. Chaum. Excuse me, I really was not comparing it to an ATM
card. I was comparing it to the bank notes and cash.
Ms. Maloney. Just the bank notes and cash?
Mr. Chaum. Yes.
Ms. Maloney. So it is very similar to the ATM in its security?
Mr. Chaum. These cards are intended to replace bank notes and
cash in low-value payments and they offer better protection to the
individual consumer than the bank notes do because they allow the
consumer to make it harder for people to steal their money.
33
Ms Ma LONEY. Thank you. , ,,
Mr' Van Lear. Basically, with the ATM network, we would re-
quire the loading of value from an account to the card to require
the PIN so you would have the same security required in order to
nut funds from your demand deposit account onto the card.
We believe that the card will be used for low-dollar transactions
and therefore there is no PIN required when you actually execute
a transaction at a point of sale. So if you were to lose the card and
you put $50 on it, that card would be available to anyone who
found it to use it at the point of sale. It does not operate the way
Mr. Chaum has outlined his, but that is an ATM transaction.
Ms. Maloney. Thank you.
Chairman Castle. Thank you very much, Ms. Maloney
I think we will break at this time. We have about 8 minutes
until the vote. This may end up being two votes, so we may be gone
for as long as 25 minutes or so before we can reconvene 1 would
like to reconvene. There may be Members ^ho w^^MJ^S^^^^tl.'I^^
want to come in and ask questions, if their staff could alert them.
We will be back as soon as the last vote is over and I have a cou-
ple more questions I would like to ask, so to the extent that you
can stay, we would appreciate it. ^u • i .\.
The staffcould try the cards out and have their lunch.
We will try to reconvene about 5 minutes after the last vote,
which I estimate to be probably in 20 or 25 minutes. Thank you.
FRpppss 1 n
Chairman Castle. If we can resume, now that we have been well
served with our stored currency or value cards. I discovered that
Entenmann's actually has a little pie, which I did not know before^
We will continue with our questioning. As I indicated, some may
not come back, some may, but Congresswoman Kelly is with us and
we will turn to her for her questions.
Mrs. Kelly. .
Mrs. Kelly. Thank you, Mr. Chairman. ^ „ ^ . . ^i, i,
I would like to address the panel. First of all, I want to thank
you very much for coming in and testifying. I think what you are
talking about, about the whole idea of handling money in the way
that you are talking about, this electronic handling, is very excit-
ing. It certainly is going to keep people's-one of the problems that
I have with my husband is that coins in his pocket keep rubbing
holes in them, in his pants pockets. You have to worry about those
things when you are a housewife. , , ^ i^ ^r
But I have to tell you, I am a little concerned about a couple ot
aspects here. I am concerned about things that are secure in terms
of our money regarding money laundering. I do not see yet in the
system of anything that I have heard about protections that would
be there for people who want to launder money electronically.
I am also concerned about certain aspects of banking on tne
Internet, because to bank on the Internet, you have to go through
a number of different systems. You are going one, two, three, be-
cause you are going through a lot of different systems to get across
ft seemT to me there needs to be in place certain types of protec-
tions to protect us if we are going to do this kind of electronic bank-
ing and crediting. I do not care who wants to speak to this issue,
34
but I want whoever responds, I want a little time at the end be-
cause I have a follow-up question. So take it away, whichever one
of you wants to jump in first.
Mr. Cook. Mrs. Kelly, let me respond. For the systems that we
are working on, together with our bank partners, all use existing
banks and existing payment methods, such as checks and credit
cards, which provides substantial traceability. All the traceability
protections which are in place today that prevent money launder-
ing in those systems, the checks and credit cards are fully available
in the systems that we are working on with our bank partners. So
no reduction in the government's ability to prevent money launder-
ing is involved in what we do.
Mrs. Kelly. Does anybody else want to talk about this vis-a-vis
the Internet?
Mr. Melton. Yes, just to answer the second part of your ques-
tion. I would agree with Scott on the first part. He is entirely cor-
rect. These systems do go through banks and so all of the
auditability is there.
We frequently start out talking about these kinds of questions-
assuming that there is a polarity or a binary relationship between
privacy, on the one hand, and auditability, on the other hand. I
would like to suggest that that is a polarity that with the new tech-
nology is not necessarily needed. There can be simultaneously pri-
vacy and, in cases of due cause or due process, there can be
auditability.
Part of that comes from the technologies that apply to your sec-
ond question, and that is if you are going through multiple points
on the network, how do you know that you are safe, so to speak,
at each point on the network? Two dual technologies. The first is
the digital signature that every party to that transaction, yourself,
there is a merchant, if there is a merchant involved, the bank, each
one of you must have a digital signature that absolutely authen-
ticates that you are who you say you are.
Then, based upon these known parties interacting together, you
achieve privacy by wrapping your interaction with the known par-
ties in non-breakable, non-openable envelopes that flow over this
new frontier space. So while the space itself may not be safe, the
envelopes through which your information passes are totally safe.
Mrs. Kelly. I see heads nodding in agreement. I find this a rath-
er imperfect world and talking about things being absolutely safe
concerns me a little bit.
I know we are going to follow up with a hearing, Mr. Chairman,
on some of this technology, but I would like very much for people
to address what technology there is with regard to security. I think
it is very important that if we do not want to hold a separate
hearing, that we address it here today, what technology there is
available, because the security of these transactions is extremely
important.
I am not so sure it is an appropriate place for government, be-
cause with the government regulations in place we may be micro-
managing something that the market forces will micro-manage on
their own. Nobody is going to give you their money to fly through
the air if they are not sure that that money is going to be perfectly
safe. So I am not so sure that is an appropriate spot for us.
35
I would like very much to put a plea in to you, Mr. Chairman,
that we have a hearing, and I do not know what technology there
is out there, but that we let people come and talk to us about that
technology specifically. Is that possible?
Chairman Castle. If you would yield, I would sugjgest not only
is it possible, I think it is very necessary. In fact, I intend to ask
a couple of follow-up questions on this whole area of regulation
here today. I think security is a very vital question, and while we
may be safe in the systems which exist today, you can imagine if
you have computers which can create value in some way or an-
other, that somebody is out there — there are probably more people
out there trying to break it than there are trying to create it, and
that does raise certain risks.
We do have to make absolutely sure, probably much more so
than we ever did within the banking system, that we are aware of
any potential changes as they come along and what we can do to
counteract that from a security point of view or a regulatory point
of view or whatever it may be. I am not a strong regulatory person,
any stronger than one has to be, but we certainly do not want a
runaway system, either.
So I agree completely. In fact, I think at our hearing with the
government officials, that issue should be addressed, and then we
will see after that what further action we may need on it.
Mrs. Kelly. And it is possible we could talk to industry people,
as well, on that.
Chairman Castle. Absolutely. This whole hearing is not pursu-
ant to legislation we are pursuing. It is basically to educate this
Congress about what is happening, and I think to some extent it
is an evolving market and we should leave it alone, but at the
same time, we need to be aware of the possible pitfalls and how
we should react to them. It is really informational, what we are
trying to develop here.
Mrs. Kelly. Thank you.
Chairman Castle. Thank you.
Following up on that, if I may, and I guess I will start with you,
Mr. Cook, although Ms. Goff mentioned this, as well, and that is
this whole area of regulation. You picked, by the way, the right
Congress. This is the most anti-regulatory Congress that has been
around in years. In fact, we just got rid of one regulation on the
floor about 10 minutes ago. We are more into deregulating than we
are into putting in new regulations, so when you make a plea that
this is a nascent industry just being bom, just trying to get off the
ground and regulation could hinder it, I think you probably will
find that falls on ears that will listen well to it.
I do not think that you would necessarily be aided by regulation,
but what I just said to Mrs. Kelly really does concern me and I
would hope would concern all of us, and that is when you deal in
the world of computers, you deal in the world of being able to add
value to a particular piece of plastic or use a computer chip or
whatever it may be, you are dealing in something that becomes a
little loose even in the minds of a lot of us, and could you poten-
tially, instead of creating $20, create $20 million by the addition
of a few zeroes, either by mistake or intentionally, and we need to
be ready for it.
36
I was talking to a reporter on the way over to vote and I indi-
cated to him that I am not for regulating in anticipation of what
may happen any more than we have to, because, A) we do not
know what will happen, and B) that can really mess up the mar-
ket. On the other hand, I think more than ever before, we need to
be ready to jump if the occasion arises. That is, if we find there
are practices which are creating problems in the market or what-
ever it may be.
I just wanted to sound out your views. I think it is a potentially
dangerous area. I just do not think it can be said to be wholly 100
percent safe from possible problems. I wanted to get your views, or
both of your views, on where you think the regulatory aspects of
this should come in, what they should be looking for, when they
should be ready to enter into the fray or whatever it may be.
Mr. Cook. I agree with your instincts. This is not an area for
government to go to sleep. At the same time, I think the things
that were described by Mrs. Kelly in terms of some of the risk
areas and the inherent incentives in the current players in the
banking system to make sure those risk areas do not become real
risks for consumers are so strong that if any of these techniques
are to work, consumers must trust them.
Consumers are naturally not a trusting sort when it comes to
new payment vehicles, so these things have to prove themselves in
consumers' minds and they will only do that with an established
track record of success where people are not losing their money un-
expectedly. So I believe there are very powerful incentives in the
marketplace to make sure these systems proceed exactly along the
lines of eliminating or handling the kind of risks that you
described.
At the same time, I think a government with the view that regu-
lation is important when it is needed and can be an inhibition or
restrain progress when it is not needed is an appropriate attitude,
and hearings like this are a helpful way to stay in touch.
Chairman Castle. Ms. Goff.
Ms. Goff. Yes, I would like to add, MasterCard International
has been working on security on the Internet, along with Visa and
Europay. I think that we would appreciate the opportunity to work
with you and to have our specialist, while it is not my area of spe-
cialty, to have our specialist come and give testimony to your sub-
committee and to anyone else who is appropriate.
We also have a subcommittee of our own International Oper-
ations Committee that is working on not only PIN but card holder
verification methodologies, biometrics, and the evolution of how we
identify card holders, which is another area that we think is very
important to the privacy of the consumer.
So we would be happy to participate and support your work ef-
forts, but certainly not to legislate at a time before the products
have actually developed.
Chairman Castle. Thank you.
I want to start to wind this down but I have one more question
that is sort of general in its nature. Again, it may come from my
own lack of understanding, but I think it is important, and that is
the Internet. Not only in the specific cards, but in some of the
transactions, even the one we talked about in purchasing the flash
37
light, which Dr. Chaum's company is involved with, the Internet
becomes, I guess, a key player in all this.
The whole history of the Internet is very fascinating, and the
whole lack of any central ownership and all the different aspects
that seem to exist are important. But is a lot of this dependent
upon the Internet as it exists today? I mean, the Internet is taking
on a life that is almost as big as television in this day and age. Ev-
eryone seems to be getting into it, and it goes all the way from
business systems to pornography. There are fascinating articles
about it.
It is this large, rather unmanaged, unowned thing that is float-
ing around out there, and yet it seems to be at the heart of some
of the systems that we are talking about in terms of invisible
money or non-money money, as we have non-bank banks, the non-
money money that we are starting to deal with here. I would be
curious as to anything you are willing to share with respect to the
significance of the Internet and the whole future of the Internet,
and again, safety issues and just where we are going with the
Internet as an aspect of this.
Mr. Melton. To quote Ms. Goff s statement, I believe the figure
that she used was that there is anticipated to be 100 million per-
sons on the Internet within the next 5 years. The figures today say
30 to 50 million. Anytime there is an assemblage of that many peo-
ple, we now have an active marketplace. Anytime there is an active
marketplace with buying and selling going on, certainly there must
be suitable payment instruments.
Already, there is a close working relationship developing between
the engineers that created the Internet and the banks and the
credit card associations. Just this past week in Stockholm, there
was a worldwide gathering of all of the Internet Engineering Task
Force. That is, the engineers that kind of get together on a collegial
basis and decide what to do.
At that meeting were representatives from most of the people
that you see in front of you, including MasterCard and Visa, talk-
ing about the very problems and the opportunities that we are talk-
ing about here today. There is a coming together. There is a
consensus developing on how we shall deal with many of these
problems. We have great faith that these problems are solvable and
they are on their way to not only not being problems, but there
being real opportunities for a reduction of cost to the consumer
with greater options for the consumer to buy things. Thank you.
Chairman Castle. Let me turn to Mr. Flake and see if he has
any follow-up questions he would like to ask.
Mr. Flake. Thank you very much, Mr. Chairman.
Let me just make a statement and then just ask for a response
to it. If people who log on to the Internet are localized geographi-
cally and thus subject to a particular set of national laws, the traf-
fic that they create on the Internet is not very obviously anywhere
at all.
When global digital cash becomes a reality, tax men and women
will have their work in deciding how to assess assets that might
be stored on a different computer in a different country every day,
even assuming they could ever find the assets or the computers.
And for those who choose to evade tax actively, the opportunities
38
offered by the Internet would be certainly tempting, just as they
already are for pornographers and others.
The question is, how will the government be able to regulate
commerce and banking on the Internet, given these transactions
can occur in any number of countries and there are different poli-
cies as it relates to how they regulate their commerce? Does any-
body want to take that? Dr. Chaum?
Mr. Chaum. Thank you. It seems to me that the Internet and
chip cards are really properly thought of as part of the same phe-
nomenon generally. We need to take an integrated solution to all
of these electronic means of payment.
The answer to the issue of tax evasion is the same as the answer
to the issue of money laundering and so on, and that is simply that
money will live in bank accounts and only be withdrawable into
these electronic forms in limited quantity. There will be only a lim-
ited amount of money which you can store on a card, only a limited
amount of e-cash which you can withdraw from your bank and
have in your work station.
In that way, this money will be no more a problem from the
point of view of the tax collector, the money laundering chasers, the
drug enforcement people, or whoever than paper money is today.
In fact, as I like to believe, and I hope is represented in my testi-
mony, at least, that that will be less of a problem than bank notes
and coins are today in that regard.
If these electronic means of payment are viewed as a low-value
cash replacement, then they should only be thought of as a way to
improve enforceability of all kinds of regulation.
Mr. Flake. When you talk about limited amounts, obviously,
with our reporting functions to the Federal Government by banking
entities now of cash that equals or exceeds $10,000, how would you
set a limit in this kind of situation? Are you talking about an ac-
tual dollar limit that would be set by some entity for which there
would be a regulating body that would oversee it, or is this going
to be a limit that is determined by whoever has charge of that par-
ticular segment of this industry? Who sets the limit and who regu-
lates it?
Mr. Chaum. There are a lot of limits in place today and they
have already been set. Those probably are adequate. I do not really
think there is a need to bring the limits which are set lower, but
the technology, of course, will reduce the cost of administering re-
porting and it will allow the limits to be set lower than they are
today, which is just another way that this kind of technology can
still protect the interests of society better than paper money.
Mr. Flake. Are the maximums on those limits determined by the
actual kinds of transactions? How do you determine what your out-
side limit is? What becomes unreasonable? What creates the possi-
bility for some type of corrupt activity? How do you set that outside
limit that you know is secure enough to protect that person who
has monies in this system?
Mr. Chaum. I think that the limits which are set today are
quite
Mr. Flaice. What do those limits look like, maybe Visa or
MasterCard?
39
Ms. Fisher. If you are talking about the stored value card, for
example, as one example
Mr. Flake. Yes.
Ms. Fishf:r. My point would be that banks, in conjunction with
their customers, will decide what is appropriate. To some extent,
you are relying on consumers' good judgment, and I think consum-
ers have demonstrated good common sense in determining what
they feel comfortable with having in a stored value card that thev
might lose, just as they make the decision every day, how mucn
money do I take out of the ATM this week that I feel comfortable
having on my person. Or similarly, those kinds of decisions that
you make every day about how much cash are you going to carry
around.
I do not think the government should set these limits. I think
these would be limits that banks, in conjunction with their cus-
tomers, would deem appropriate from what the marketplace would
like to see made available to them.
Mr. Flake. It is not just a consumer issue. I think all of us un-
derstand that as you develop systems, there is someone developing
a counter-system that will allow them to be able to access the
means of being able to take advantage of other people. I mean,
when I get a $3,900 phone bill on my car telephone, in spite of the
fact that I have a PIN number, there is always somebody out there
aggressively operating the same as you do in terms of trying to cre-
ate a positive means of being able to do business, there is someone
out there doing business that is corrupt and they are looking for
ways to see if they can take advantage of it.
So I guess a part of our concern will have to be what kind of
safeguards you put in, if you need any at all, and maybe your max-
imum limits are of such nature that you can control it. But I am
not sure, given the safety factors that we have seen, whether it is
the cellular phone industry or other industries, that there are peo-
ple who are going to find ways to take advantage of this.
If there are no other comments, I yield back my time.
Chairman Castle. Thank you, Mr. Flake.
At this point, I would like to wrap up the hearing. Is there any-
thing that anybody has heard that they feel should not go
unreoutted or unstated before we close? Mr. Van Lear?
Mr. Van Lear. I am not going to rebut something but I think I
would offer an observation, and that is I think the role of govern-
ment is not just to provide the oversight, but I think in this
particular case, government really should be looking at taking ad-
vantage of some of the technology that we have here. We have an
opportunity to do things that I think the government wants to do
and should be done, and in particular, I will speak to the area of
remote distribution.
In the entitlement programs that are in place today, the cost to
the recipient for being able to take that entitlement check, which
is typically in the form of the check, and have that check cashed
and then do bill payment is an extraordinary amount of money.
Most of the people who are on those entitlement programs are non-
banked people.
We have technology, and it is running in the State of Delaware
today, where we can cash a check at an ATM to the penny. We
40
have technology through some of the products that are offered by
people at the table here who, in fact, can provide bill payment
through those ATMs for non-bank people. If there is an incentive
for us to do that, those kind of products can be delivered and the
beneficiary of them will be the taxpayer, because it will be a lower
cost solution, and the beneficiary will also be the people on the en-
titlement programs themselves.
So I think government needs to take an active look at what this
technology can do for them in the various areas of entitlements and
electronic benefit transfer and do that in an aggressive role. There
are a number of partners, such as our organization, who are more
than happy to do that.
Mr. Flake. Let me just offer one reaction to that, and that is
that I agree with you wholeheartedly, it is a great thesis. The prob-
lem is that in many of the poor communities where people receive
the benefits of entitlement programs, there has not been a historic-
ity of institutions and entities wanting to provide the same kind of
access, so that you do not have banks, you do not have ATM ma-
chines, so that the question becomes, even though this is prob-
ability, and I tend to agree with you, this is probably safer. It
keeps people from worrying about having checks stolen and so
forth.
How do we guarantee in those communities that are, in effect,
what many in various industries would consider poor communities
and therefore do not provide a level of opportunity for access to
those services? How do we guarantee that those services will be
available to them? It would solve a myriad of problems for us if,
in fact, it worked the way you suggest it would, but I just wonder
if it really will. Will these communities and persons in those com-
munities still be left out of the process and left out of the loop?
Mr. Van Lear. I think you have two issues there. One deals with
the ability for the current and past technology to be able to deliver
this kind of service. In the past, in order to cash a check or to put
a deposit in an ATM, you were required to have an account at a
financial institution. The financial institution had a cost associated
with that, and so therefore the unbanked, if you will, were
unbanked because of the fee structure that was associated with
banks being willing and able to do that at a reasonable fee.
If the technology would provide for the equipment to do the
check cashing wiuiout the involvement of an account on file with
that institution, and that can be done, then there is a reason for
the deployment of those technologies to take place in locations
where they have not taken place to date.
It is not a brick and mortar issue. It is a matter of being able
to deploy technology that today can effectively take a payroll check
or an entitlement check or a government check and basically cash
that for someone without an account. That service can be developed
and it can now be delivered. It could not have been delivered years
ago, simply because the ATM was limited in its ability to perform
that function.
So I think there is an incentive and there is an opportunity here,
but it is going to take people working together to do that and I just
think that government ought to take a proactive role in looking at
what those opportunities are.
41
Mr. Flake. I think some of us would want to do that for an addi-
tional reason. That is, many of the people in those communities
now pay about 20 percent iust to cash that check. I think I would
be more than willing to talk, have some more discussions with you
and any members of this particular panel, because I can see some
long-term positive benefits from it, and hopefully, working to-
gether, we can resolve how those individuals who are living sort of
hand-to-mouth in some instances will have more of their own re-
sources to live with by virtue of the fact that the technology has
been brought to those areas where they live.
Thank you very much. I appreciate your answer.
Chairman Castle. Mr. Melton, did you want to answer that?
Mr. Melton. Yes. I was just going to add to the comments that
were just being made. While ATMs certainly are capable of provid-
ing the kinds of services you are talking about, there are now many
locations developing where we do not even need the cost of an
ATM. The very kind of equipment you see sitting on the table down
at the end here, where we are talking a few hundred dollars, now
is capable of doing the same kind of ATM-like functions.
This kind of equipment ends up being at the grocery store or at
the kinds of service establishments without much of an overhead
burden to that store. They frequently need the equipment anyway
for doing other kinds of transactions and these same kinds of
things can be done through that equipment with almost zero addi-
tional cost.
Chairman Castle. Is there anything else anybody would like to
add? Mr. Cook.
Mr. Cook. Let me just add a description of an additional benefit
area of what PC technology can bring to people's finances to add
to the benefits that have been mentioned already.
Probably the best illumination of this is to describe a story which
points up how complex financial matters have gotten for people in
this economy. It used to be so simple. When you wanted to refi-
nance your house, there was one kind of mortgage. You could com-
pare interest rates and know which one was the best. Today, there
are so many different variations and types and styles and rates
and different ways they work, which have all been designed to give
customers more choice and pick the best one, but it is bewildering
today. The same thing is true in mutual funds and investing and
saving issues.
Just one simple description of that was brought home to me
when a member of the press, who I was describing what we were
working on last year, he said, let me tell you about my recent expe-
rience in refinancing my house. He had done this before. He was
knowledgeable about how. He called his banker and said, I am
trying to minimize my cost over the next 5 years, at which point
I will trade up to a larger house. Which of your mortgages do you
recommend?
The person at the bank described the various mortgages and
then recommended one. He said, well, that is not the lowest-cost
one. The banker said, what do you mean that is not? The customer
said, well, I am using the Quicken mortgage calculator. We have
this simple mortgage calculator in Quicken. He said, this other one
that you are not recommending is, in fact, lower cost. For a few
42
minutes' time on the part of that customer, he saved himself hun-
dreds of dollars.
I later ran into the vice chairman of the bank at the bank this
person was dealing with and I mentioned this story, and I did it
very sympathetically, knowing how hard it must be to assure con-
sistency and quality across hundreds of branches and thousands of
bank employees, or any kind of employees in financial products
which are as complex as they are today. And he said, no, Scott, it
is not difficult, it is impossible.
So we literally have a financial system which, in its great cre-
ativity, has built great products of all kinds, but helping poor con-
sumers, or helping any consumers make the decisions about which
ones are right for them, there has not been a similar advance in
the art. We think that computer technology of the type we have
talked about today will help people make sounder financial deci-
sions that literally will save them hundreds of dollars a year, and
upon things like retirement could make a difference of hundreds of
thousands of dollars a year. That is, I think, part of the promise
of these technologies.
Chairman Castle. Let me thank all of you very, very much. We
really appreciate this hearing. I think we are breaking new ground
here in terms of hearing about the use of the — I don't like the ex-
pression of non-money money. I never liked non-bank banks, so
want to be careful about that. [Laughter.]
But the concept of using computer technology in general, the
Internet, the stored value cards, the different way of being able to
purchase things that we have just not been exposed to before.
I think we have heard some very interesting things, one which
clearly is, let the market form itself, and that is correct. If the con-
sumers are not going to take to it, it is not worth much, and you
cannot regulate it out of business before it gets there so we need
to pay attention to that.
A number of us raised questions about security. You did, as well,
in many instances in your statements, and we need to be also, I
think, concerned about that.
Regulation remains an issue that we are going to discuss later
in September. I remind you of what I said in my opening that Mr.
Diehl had said, and he was in the back of the room during most
of this hearing. He had indicated that, left alone and unregulated,
the market might produce an electronic 'Tower of Babel" with no
single standard of technology and many opportunities for law
avoidance and criminal transactions. An overreaction? I do not
know. This is something we have to find out.
But in any event, I think we are all aware that the world of com-
puters changes much faster than the paper world ever changed,
and for that reason we have to be anticipating and ready for all
this.
Here at the end, and at some point in the middle of the testi-
mony, we heard about potential services to those who cannot afford
all of the upscale computer links or whatever it may be, but there
may be other values that could be added for them that could, in
fact, relieve them of some of the burdens which they face today
that perhaps we do not think about a great deal, such as check
43
cashing charges and loss of stamps and other things that may hap-
pen. I think that is valuable, too.
We have an accumulation of lights and pies and cards and all
manner of things as exhibits of what can be done with all this, and
we appreciate that, as well.
We do not have legislation in hand. We do not have regulations
in hand. This hearing was not for that purpose, nor are we develop-
ing any, I might add. This hearing was not to get that process
started. It was to learn more about what you are doing.
I address this to the panel but also to the other individuals who
are here who are interested in this for various reasons. We are
very interested in developing whatever knowledge we can. There-
fore, if you have knowledge or articles or something that you think
might be helpful, my staff would be glad to read it. I am not sure
that Mr. Flake and I have time to read it all, but our staffs cer-
tainly can, and they are up here with us and we appreciate all the
good work that they have done because we want to absorb as much
as we possibly can.
We do not want to interfere with what you are doing at all. We
want to encourage you. We want to encourage you to develop new
products in the marketplace and save people money, help them
with their retirement, as Mr. Cook has talked about, whatever it
may be. On the other hand, we want to make sure that we are car-
rying out our responsibilities as well as we can, also.
So we appreciate you being here today and answering questions.
There is a possibility that when we get through with all of this, we
may have additional questions which we would like to be able to
submit in writing to one or more of you if you would be kind
enough to look at those and answer them. That may or may not
happen.
That is all I have to say in conclusion. With that, again, we
thank you, and we stand adjourned.
[Whereupon, at 12:59 p.m., the hearing was adjourned.]
A P ? E x\ D I X
July 25, 1995
(45)
46
The Future of Money hearing - July 25, 1995, 10:00 a.m..
Room 2128 Rayburn House Office Building
Hearing to explore the impact of new technology on future payment systems, money supply,
privacy issues, security and regulatory compliance issues.
Chairman's Introduction:
The subcommittee will come to order. Welcome to the House Banking and Financial
Services Committee, Subcommittee on Domestic and International Monetary Policy Hearing
on the Future of Money. Again, this Subcommittee is positioned to have initial jurisdiction
of an important area of public policy.
The Future of Money contains the potential both for great commercial promise and
for enormous risk of undermining the system of exchange and the administration of justice.
This is true whether the media of exchange enter electronic commerce using computers
linked into networks or via computer chips embedded in cards or other devices.
At a recent hearing on the Dollar Coin before the Senate Banking Committee, Philip
Diehl, Director of the Mint, noted that the state of affairs with Electronic forms of money
was analogous to the situation before the Civil War when local banks issued their won
paper money. He foresees that left alone and unregulated, the market may produce an
electronic "Tower of Babel", with no single standard of technology and many opportunities
for law avoidance and criminal transactions. We will begin to explore these emerging
"Third Wave" forms of currency and begin to define the appropriate role of the federal
government with reference to this evolving technology. This will not be accomplished in a
single day or one hearing. This morning we will hear from a panel of six expert witnesses,
all from the private sector. With their assistance we will begin to consider some of these
vital issues. At a later hearing, governmental entities with responsibilities in the
management of the integrity of our monetary system and others with responsibilities for the
enforcement of laws relating to it, will testify. At that time we will consider in greater depth
public policy issues raised today.
With more than two trillion dollars currently moving electronically each day between
U.S. institutions, the safety and security of this system is not to be taken lightly. Basic
requirements are clear. Payment instruments must be widely accepted, convenient, cost
effective, safe and confidential to assure wide usage. The legitimate law enforcement and
public policy interests of the government must also be recognized. Cooperative efforts
between banks as an industry and between banks and the government have made the
current payment instruments successful and widely used, and if these precedents are
applied in future payment mechanisms, they may be made similarly successful.
47
We are indeed fortunate to have before us some of the pioneers of new electronic
payments technology to discuss their creations and the implications of its implementation.
They are:
David Van Lear, President, Electronic Payment Services
Dr. David Chaum, Chairman and CEO, DigiCash Inc.
William Melton, Chairman and CEO, CyberCash Inc.
Rosalind L. Fisher, Executive Vice President, Visa USA
Heidi Goff, Senior Vice President, MasterCard International
Scott Cook, Chairman, Intuit Inc. - Owner and developer of Quicken, the leading personal
flnance and home banking software.
48
STATEMENT OF FLOYD H. FLAKE
BEFORE THE HOUSE SUBCOMMITTEE ON
DOMESTIC & INTERNATIONAL MONETARY
POLICY
JULY 25, 1995
I thank you, Chairman Castle, for convening this
important hearing, and I congratulate you for your
diligent effort to explore various issues as they relate
to the future of our money supply. As you are
certainly aware, our committee is beginning a process
that will examine the United States' payment systems,
and the new technologies that might change
traditional means of monetary exchange. We are,
however, obliged to examine the government's role in
the context of potential social, tax and criminal
implications of these new payment systems. Knowing
49
this, it is imperative for the committee to look at the
efficacy of the various programs on their merits, and
to resist the undoubtedly exciting nature of these
hearings. Consequently, I look forward to our future
deliberations on this subject.
Briefly, I will outline some of my concerns. With
respect to stored value cards, I recognize that these
cards will definitely be a plus to consumers, especially
as the advanced technology is further developed.
However, will the cards maintain anonymity in
financial transactions, and how secure will the smart
cards be?
Another concern is the availability of this
technology in poor communities. Presently, there is a
50
dearth of banking and financial services in minority
and poor communities due to redlining. What will this
committee do to ensure that this does not occur with
new payment systems. Given the historical
unavailability of high technology in poor communities,
I believe that it is this committee's responsibility to
ensure the universal availability of these new services.
Finally, Mr. Chairman, electronic banking
presents the same concerns with the additional
prospect of tax evasion and money laundering activity.
Moreover, how will people know legitimate online
services from fraudulent ones? With more than 30
million current users, and a projected 200 million
users in the future, there are cyber-criminals who cant
51
wait to use the Internet for ill gains via phony home
pages. Obviously these are vital public policy issues,
and I look forward to commentary from our witnesses
and other committee members.
52
REPRESENTATIVE EDWARD ROYCE
OPENING STATEMENT
SUBCOMMITTEE ON DOMESTIC & INTERNATIONAL MONETARY POLICY
July 25, 1995
THANK YOU, MR. CHAIRMAN, FOR HOLDING THESE TIMELY AND
IMPORTANT HEARINGS. I AM EAGERLY LOOKING FORWARD TO
THE TESTIMONY OF THESE WITNESSES REGARDING HOW
DEVELOPING TECHNOLOGIES IN THE PRIVATE SECTOR ARE
PUSHING THE ENVELOPE OF HOW WE HANDLE FINANCL\L
TRANSACTIONS, COMMERCE AND EVERYDAY PURCHASES.
THE TECHNOLOGY THAT WILL BE DISCUSSED TODAY IS
CERTAINLY AWE INSPIRING AND TO SOME A BIT FRIGHTENING.
WITH THE EMERGENCE OF E-MONEY, SMART CARD SYSTEMS
AND DIGITAL CASH AS VIABLE AND SECURE ALTERNATIVES TO
ORDINARY MONEY A MAJOR STEP WILL BE TAKEN IN THE
DIRECTION OF FULLY DIGITIZING CURRENCY.
CONSUMERS WILL LITERALLY HAVE AT THEIR FINGERTIPS
ACCESS TO MAKE PURCHASES OR FINANCIAL TRANSACTIONS
FROM ACROSS THE WORLD AT AMAZING SPEEDS. BUSINESSES
AND BANKING INSTITUTIONS WILL HAVE A MORE SOUND AND
53
ACCURATE MEANS IN WHICH TO IDENTIFY AND APPROVE THESE
TRANSACTIONS - AND ALL OF THIS UNDOUBTEDLY WILL SAVE
MILLIONS OF DOLLARS A YEAR IN PAPERWORK. THIS IS TRULY
USING TECHNOLOGY AND PRIVATE SECTOR INNOVATION TO THE
BENEFIT OF OUR SOCIETY.
UNFORTUNATELY, AS IS SO OFTEN THE CASE, WITH
ADVANCEMENTS COME INCREASED RISK. INCREASED RISK IN
THE FORM OF FRAUD, THEFT AND POTENTIALLY VAST MONEY
LAUNDERING SCHEMES CARRIED OUT BY THOSE WHO WOULD
SEEK TO EMBEZZLE FROM AND MISUSE DEVELOPING
TECHNOLOGIES.
I UNDERSTAND THAT AS COMPANIES GO FORWARD WITH THESE
INNOVATIONS IT WOULD BE UNWISE AND EVEN HARMFUL TO
OVERREGULATE THE PROCESS. I HOPE THAT OUR WITNESSES
TODAY WILL HELP EASE THE CONCERNS OF SOME IN LAW
ENFORCEMENT, AS WELL AS CONCERNS OVER SAFETY AND
SOUNDNESS AS THE MARKET PROCEEDS TO BRING OUR DATED
PAYMENT SYSTEM INTO THE 20TH CENTURY.
54
REPRESENTATIVE JACK METCALF
OPENING STATEMENT
SUBCOMMITTEE ON DOMESTIC & INTERNATIONAL MONETARY POLICY
July 25, 1995
THANK- YOU MR. CHAIRMAN,
AS ONE WHO HAS WATCHED HISTORY, IT IS FASCINATING TO
WATCH A NEW WAVE OF TECHNOLOGY COME TO THE
FOREFRONT OF OUR SOCIETY, I MUST SAY IT IS OBVIOUS OUR
WORLD IS CHANGING RAPIDLY, ESPECIALLY IN THE COMPUTER
AND INFORMATION SERVICES ARENA.
AS I SEE THIS NEW ERA OF ELECTRONIC MONEY, SMART CARDS
AND CYBER-CASH THERE ARE A COUPLE OF AREAS I MUST
INTERNALIZE. IT IS OBVIOUS THE MARKETPLACE IS DICTATING
A NEW METHOD, A METHOD WHICH STREAMLINES EVERYTHING
FROM HOW WE PAY OUR MORTGAGE TO HOW WE BUY A COKE.
YET, GOING HEAD-LONG INTO A NEW TYPE OF ELECTRONIC
MONETARY SYSTEM BRINGS WITH IT MANY QUESTIONS.
QUESTIONS LIKE PRIVACY AND SECURITY, COMPETITION IN THE
MARKETPLACE, ASSURING THE INTEGRITY OF TRANSFERRING
MONEY AND ASSETS, GUARDING AGAINST ILLEGAL ACTIVITY
SUCH AS MONEY LAUNDERING AND TAX FRAUD, AND ONE OF
THE MOST IMPORTANT ASPECTS I SEE IS THE POTENTIAL FOR
SYSTEMIC RISK. THAT IS A COMPLETE BREAK DOWN OF
FINANCIAL MARKETS AND THE FINANCL\L SYSTEM AS A WHOLE.
55
EVEN THE CONGRESSIONAL RESEARCH SYSTEM MENTIONS THIS
AS AN AREA OF CONCERN. AS FINANCIAL TECHNOLOGY HAS
INCREASED AND FINANCIAL TRANSACTIONS ENTER HYPER-
SPEED, THIS CAN ASSIST IN INSTABLE SITUATIONS LIKE THE 1987
STOCK MARKET CRASH OR THE DERIVATIVE LOSSES COMPILED
BY BARINGS BANK.
I AM EXTREMELY INTERESTED, IN HOW THESE AREAS WILL BE
ADDRESSED BY THE MARKETPLACE AND BY GOVERNMENT.
AND I LOOK FORWARD TO YOUR FEELINGS ON THESE ISSUES.
THANK YOU, MR. CHAIRMAN.
56
REPRESENTATIVE J.C. WATTS, JR.
OPENING STATEMENT
SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL MONETARY POLICY
HEARING ON THE FUTURE OF MONEY, JULY 25, 19 95
Good morning. I would like to thank the witnesses for being
here and the Chairman and his staff for holding this hearing.
As the "information highway" emerges into the markets of home
banking and electronic commerce, I think this is a ripe opportunity
to examine a multitude of issues -- banking industry and consumer
concerns, privacy issues, law enforcement and the role, if any, of
the government as regulator. I look forward to hearing your
testimony and again thank you for being here today.
57
CAROLYN B. MALONEY
Uth DiSTBicT. New York
Congress of tfje Uniteb ^tam
ji)oust of EcprfScntatibcs
iiaaaBt)ington, DC 20515-3214
OPENING STATEMENT
"The Future of Money"
July 25, 1995
Thank you, Mr. Chairman.
I look forward to listening to testimony from today's panelist. It appears that we are
embarking upon a brave new world in which the need for cash will be virtually eliminated.
Prepaid cards may eventually provide more security than cash.
But as we enter this new world, I hope we find ways to include all Americans. These
new technologies may prove to be out of reach for the poor or the elderly. The testimony we
are about to hear indicates that younger Americans adapt more easily to the new technologies.
They are more likely to use ATM machines, bank by telephone and use computers.
Although the number of Americans who own computers has grown exponentially, they
are still too expensive for many. And although the Internet is relatively cheap, it still remains
outside the reach of many.
On the other hand, the possibilities opened up by the new technologies are fascinating -
- prepaid cards will help eliminate the annoying problem of searching for exact change on
buses, at parking meters and at the laundromat.
In many neighborhoods of New York City, few people have bank accounts. For that
reason, check cashing offices have flourished. They charge sizable fees to cash checks for
people who have no banks. Those who cash their checks at these places have no place to keep
the resulting cash. They become walking targets for thieves who prey on the vulnerable.
Prepaid cards with good security may be a solution to this problem.
I look forward to learning more about these new possibilities.
Thank you.
IIOEastsStm Stueet
2N0 Flooo
New York. NY 10022
(213) 832-4631
28-11 AsroniA Blvd.
A5TOIIIA.NY 11102
(7161932-1604
619 LOMUEH Stkeet
enooKLrN. NY 11211
(718)30.1260
58
Electronic Payment Services. Inc
IIOOCarrRoad
Wilmington, DE 19809
imammELt
a a mm PAYMEi
m a mm SERVICES^
Submission In Support
of the
Remarks of David M. Van Lear
to
United States House of Representatives
Committee on Banking and Financial Services
Subcommittee on Domestic and International Monetary
Policy
Hearing
The Future of Money
July 25, 1995
59
EPS was formed a little more than two years ago as a result of a
number of emerging trends within tlie banking industry. The growing and
rapid consolidation of the banking industry has led EPS' owners to conclude
that they need to provide consistent services to their consumers over a
broader geography.
The cost of research and development for these new financial services
have reached staggering numbers. As a result, very few financial institutions
can individually continue to make the level of investment that is required to
provide new financial services. Therefore, a company like EPS which
combines the resources of a number of large regional financial institutions is
better able to amass the investment capital required to develop new financial
services and enliancements to the current electronic payment systems.
Over the past twenty years, our industry has developed services using
electronic means wliich provide consumers with a never before known level
of 24 hour, seven day a week access to their funds. As a result of this
convenience, and the reliability of our systems, tlie public has developed great
confidence in our services. Due to this confidence, the consumer is asking for
even greater levels of service and convenience. We are at the threshold of
providing the fiill range of financial services directly to tlie home, which
according to market research, is where consumers would like tliem, EPS is
extremely interested in being a provider of these new levels of services for the
consumer. The key requirement of a payment system process is systems
integrity — without this, there would be no consumer confidence and thus no
commerce.
Let me give you some history on the development of the existing levels
of Electronic Commerce and the steps we in the banking industry have taken
to provide system integrity. Electronic commerce is dependent on several
major factors. First, the establishment of a communications network which
allows parties to communicate instantaneously witli each other. Second, tlie
development of computer systems which allow for the swift accurate
verification and autliorization of transactions.
In addition, there are a number of major issues wliich provide the base
upon which public confidence is built. First, there must be an assurance that
the transfer of value will occur safely based on financial soundness of the
party settling transactions. Second, the system must provide a reliable means
60
of accurately autlienti eating transaction requests by a consumer and assuring
all parties that the transaction is vaUd. Third, there must be system security
which assures all participants that only the appropriate parties will have
access to sensitive personal and business information and the funds to be
transferred. Lastly, there must be protection of privacy for the consumer, the
bank, the merchant or any other party to a transaction. All of these factors
are required to provide die system integrity and reliability which we have
built into our current services.
Electronic commerce takes place using some form of electronic
processing for the exchange of value. United States coin and currency are tlie
means of value exchange which have been authorized, sanctioned and
controlled by the government. The government's role is to preserve and
control this means of value exchange.
Late in the 1 9th century, with original development of commercial uses
of electricity to provide communications, the very first example of electronic
commerce was developed through wire transfers. An example of tliis type of
commerce was the Western Union Telegraph Company service where an
individual delivered currency to a Western Union office and an instruction
was sent to another location to disburse an equal amoimt of currency to a
party that was able to identify himself properly at that other location. After
such authentication of tlie party was established, cash was delivered.
In this example, there was no banking environment. Western Union, a
communications company and not a bank, provided the services. Assurance
of payment was not provided in any fasliion otlier than the financial stability
of tliat company. Security was provided because it was a privately controlled
single purpose transmission facility used to send messages and these kinds of
funds transfers. Authentication was provided by a signature at the other end
of the transmission to verify tliat the party who received the funds was the
intended party. Because this was a dedicated, privately controlled
communications line, it was not shared with tlie public and tlierefore
transactions were private.
After World War II there was a tremendous growth in consumer
banking in the United States. Individuals who had never had checking or
savings accounts before, began to use financial institutions for tliis purpose.
The use of checks became wide spread, but payments by check were
61
cumbersome and tliere was no assurance that a check would be honored. In
tlie mid 1950's a new product, a travel and entertainment card, began to be
used by individuals, particularly those who traveled on business.
As computers were developed and began to be deployed by banks in
tlie early 1960's, tlie ability to maintain information and to quickly check
records about individuals and their credit histories became substantially
greater and more effective. During the middle 1960's these improvements in
computing technology fostered the creation of a new financial product, the
credit card, wliich then began to be issued to large number of consumers. A
credit card simply represents a pre-approved extension of credit by a financial
institution to a customer. Tlie advantage to the merchant was a higher level
of assurance of payment for goods than checks as the issuer of tlie card was
guaranteeing payment.
When a credit card is used to purchase goods and services, tlie
merchant will obtain an authorization for such a transaction which guarantees
payment. The merchant's bank then collects tlie ftmds fi'om tlie consumer's
bank. This system became more electronic as newer communications
systems and electronic tenninals capable of capturing information over the
telephone lines where developed. Additionally, associations of financial
institutions, such as MasterCard and Visa ,were formed to establish rules and
methods for conducting inter- bank transactions between the issuers of cards
and the merchant banks who acquired transactions througli their merchant
customers. These associations helped to provide standards for authenticity,
security and to add certainty and reliability to the system.
Now when a consumer presents a credit card to a merchant, the
merchant will swipe tlie credit card througli an electronic terminal and receive
an electronic autliorization of tlie transaction. The transaction is tlien
submitted to the merchant's bank who will collect the fimds fi^om the
consumer's bank. The transaction is completed by depositing those ftmds
into the account of the merchant.
Wliat issues are relevant to this process? First, all transactions are
occurring witliin the banking system and, tlirougli regulatory oversight, the
safety and soundness standards are applied to the various banks which
provide the settlement ftinctions to assure payment. Second, authentication of
these transactions is handled by a signature of the cardholder compared to the
92-489 - 95 - 3
62
signature on tlie card. In some cases today, a photo of the cardliolder is
actually on the card and can also be used for identification. The status of tlie
account is checked by the bank which issued the card to the consumer.
Various status messages are sent by the cardholder's bank back dirough tlie
system to tlie merchant terminal, either approving or declining the transaction.
Security is provided since the transactions are maintained within the banking
system. Consumers and merchants use banks which operate within the card
association rules which have been accepted by contract. Privacy is provided
because tliese are contained, not public systems, and there are strict system
rules on infonnation disclosure to third parties.
Following the introduction of credit cards, tlie next major advance in
teclinology was the development of a macliine tliat could perform many of die
functions of human tellers. Beginning in the early 1970's these automated
machines, ATM's, began to be deployed by banks who tlien issued access
cards to their depositors enabling them, for the first time, to obtain electronic
access directly to the fiinds they had placed on deposit with a bank. The
consumer could now get cash and make deposits tlirougli the ATM machine
at any time of the day, even when tlie bank offices are closed.
In a cash witlidrawal througli an ATM, currency is dispensed tlirougli
tlie ATM operated by the customer's own bank. All transactions are
between tlie bank and its own customer. Payment assurance is througli
application of tlie safety and soundness standards the bank. Security is
supplied by tlie use of an electronic signature, an encrypted personal
identification number or code, which is used by the cardliolder to identify,
verify and autlienticate the transaction request. Since the entire transaction is
conducted witliin the customer's own bank, monitoring of the various lines
and systems provided security. This is like a private communications facility.
The authentication is provided because the bank authorizes the transaction
against the funds that are on deposit and verifies tlie request by tlie use of the
personal identification number or PIN. As to privacy issues, since the bank
controls all of tlie infonnation exchange between die cardliolder at tlie
macliine and itself, tliere is no privacy concern. This same system is used for
electronic cash deposits dirougli die ATM. In tliis particular case, all of tlie
protections that apply to a cash withdrawal are applied to a cash or check
deposit.
63
In the evolution of electronic commerce, the next major development
was the fonnation of what is known as ATM networks. In tliese situations, a
bank or a third party data processor acts as a switching point for various
financial institutions which are linked to a network computer. These
connections allow the exchange of information between banks. Generally
these networks operate with a common name or logo. In EPS' case, the
trademark we use is MAC, which is an acronym for MONEY ACCESS
CARD and MONEY ACCESS CENTER. OUier major networks you may
be familiar wiUi are known as HONOR, MOST, NYCE, STAR PULSE and
TYME. There are approximately 60 ATM networks in tlie United States
today.
With an ATM network, a customer of one bank is able to use an ATM
operated by a different bank. Money dispensed tlirough tlie ATM comes not
from the customer's own bank but through the ATM of the second bank. The
transfer occurs by the exchange of information from one ATM to the network
switch to the customer's own bank.
At the end of each day there is a settlement among the banks for the
exchange of funds. In network transactions, we see tJiat all transactions
continue to take place within the banking system, providing assurance of
payment safety. Where processing is provided by tlurd party processors,
such as EPS, the processors themselves are exammed by the various federal
regulators for system integrity. Authentication of transactions is provided just
as in the previous example by review of customer records and tlirough the use
of die electronic signature, the PIN, wliich verifies tlie request of tlie
cardholder and validates their transaction request. Seciuity is also provided
in such fashion tlirough tlie monitoring of lines and systems and tlie use of
dedicated leased communications lines. Encrypfion or coding of the PIN or
the electronic signature occurs at tlie ATM to prevent unautliorized capturing.
Tliis encryption flows tlirough the system to protect the cardholder. As to
privacy, we have current federal laws diat relate to bank exchange of
information and agreements between banks networks and processors of
confidentiality.
As all of these systems developed in tlie middle 1970's tlirough the
early 1980's it took a period of time for the average consumer to get used to
using the systems and to develop tlie required confidence. However, once the
convenience and the reliability of these systems was established, consumers
64
desire to use these kinds of financial services for additional uses has
expanded. The largest growing number of electronic transactions today is in
the area of debit point of sale transactions, hi this case, that means taking the
card that you know as your ATM card to a merchant, (such as a supermarket,
a gas station, a convenience store or some other store and using that card) to
make a purchase in place of using cash, or a check or credit card. The
transaction works very much hke a credit card transaction with a few
exceptions. In this instance the ATM card is given to the merchant for tlie
purchase. The merchant uses a higlier grade transaction terminal and swipes
the card in the tenninal wliich reads tlie information, the customer enters his
PIN and then tlie tenninal routes tlie requested transaction tlirough the ATM
network back to the customer's bank for authorization against the customer's
demand deposit account. The funds, once approved, are transferred from the
customer's bank to the merchant's bank and placed on deposit there.
Again, we have a situation where these fransactions are fully witliin tlie
banking system and safety of payment is assured. The tliird party processors
who provide services for merchants, like EPS' Buypass subsidiary, are also
examined by the federal regulators for system integrity. Both tlie consumer
and the merchant maintain bank accounts, and tlie funds are transmitted inter-
bank within the payment system. Authentication is provided just as at the
ATM by the use of the electronic signature or PIN to verify and authenticate
the request. Security is provided because tlie PIN's are sent tlirough tlie
system on an encrypted basis. Further, the PEN pads and terminals in use
today have been made tamper proof Should someone attempt to do
sometliing with them to capture these PINS, the tenninals and PIN pads
would not function properly. Dedicated communication lines are also ofteri
used, particularly by larger merchants. In tlie area of privacy, we have
network rules which require privacy, confidentiality agreements between tlie
bank, the network and tlie processors and also federal law.
As consumers have become comfortable with the use of ATM' s and
increasingly at tlie point of sale, tliey have asked for even greater
convenience. Thus, they desire to interact with tlieir banks and merchants
from remote locations, like tlie home. Today, a consumer can perform
electronic banking througli either a telephone line or a personal computer.
Initially, this was confined to transactions by a consumer with his own bank
such as obtaining account balance infonnation, transferring fiinds between
accoimts, finding out whether checks have been processed and cleared
65
tlirougli tlieir account. All of these transactions remain within tlie customer's
bank. Authentication is provided through tlie use of a password. Tliis
password is not the same as tlie PIN used in a debit transaction at an ATM or
point of sale tenninal. It is changeable by the customer at will. Moreover,
these passwords are not encrypted and thus less secure. However, these
transactions all take place within a single bank and thus are secure. As to
privacy, all infonnation is within a single bank and therefore there is no major
issue.
Another service developed in tlie early 1980's and which has
increasing interest from consumers is tlie abihty for consumers to perfonn
electronic banking which includes die payment of bills to merchants and
others. In this particular circumstance, a customer establishes witli liis bank
certain merchants on a file and regularly use either a telephone or a personal
computer to direct their bank to make payments to these merchants. The
bank either transfers funds dirough an automated clearing house or actually
creates a check and mails it to a specific merchant. These transactions are
within the banking system, providing assurance of payment. The fimds will
move only after the bank has autliorized them. The authentication is provided
by virtue of a password and die bank must make tlie authorization before it
will make tlie payment. Security is provided by use of a changeable
password. Again, privacy is provided by virtue of the fact that all instructions
remain between the customer and tlie bank who will pay the merchant.
The past 20 years has seen tlie deployment of a substantial nmnber of
ATM's and Point of Sale terminals and a high level of acceptance of basic
electronic services tlirough financial institutions. It should be noted tiiat
today tliat Uiere are more dian 1 00,000 ATMs in the United States and it is
projected that by the year 2000 there will be 200,000 ATMs. On tlie otlier
hand, there are currently 20 million personal computers in tlie United States
and that number is expected to expand to 50 million by the year 2000. Tlie
rapid increase of computer capability and steeply declining prices means
people who never had access to computers will have and use tliem regularly.
At the same time, there have been great advances in communications
teclinology. Communications tlirough fiber optics and other methods such as
satellites and cellular transmission allow voice, data and graphics to be
communicated tlirough die same line.
66
These changes are exhilarating. They provide the ability to create a
new level of convenience for the consumer in the conduct of his daily
financial affairs. By the year 2000, most of those 50 milhon computers that
are deployed will be capable of being used as though they were an ATM
located in a person's home or in their office. Personal computers will allow
them to conduct their everyday financial transactions efficiently.
We believe that these desires need to be satisfied. Electronic
commerce is on the threshold of many new exciting services and we intend to
provide them. Nevertheless, we are concerned about a number of very
important issues. These issues strike at the very heart of system integrity.
First, who controls the system and how is it monitored? This goes to the
question of payment assurance and safety and soundness of the system. It
also raises the question of who has jurisdiction over the system and whose
laws will be applied. Concern is also raised over tlie ability to audit tlie
system. This has implications for both tracking the money supply and for
taxation. If you can't audit the system, tlien you can't detennine the volume
of money which flows tlirough it. Moreover, an auditless system allows
transactions which can't be tracked creating a major problem for taxing
authorities.
Today, tliis Committee is inquiring about the development of
commerce on the Internet. The Internet is an interconnection of computers in
over 90 countries. There is no central authority which sets any standards or
controls commerce over this communications facility. Entry to the system can
come from many places and tliere is no central body through which all
infonnation must pass. Tlie consequence is that there is no one body which
can assure participants tliat the system has integrity.
How would a transaction take place? A consumer would use their
computer to enter the Internet througli a service that provides an entry point.
Then the consumer would turn to a shopping page or if tlie specific merchant
had an address on the Internet, the consumer would browse the offerings. To
make a purchase, tlie consumer would fill out a form electronically and
include a credit card number. The consumer must then wait for tlie goods to
be shipped. But what happens if the goods never arrive? Today, tlie consumer
has the protection of our credit card laws and rules of the card associations.
In the world of electronic money these protections may not exist and there is
the question of who has the authority to impose them. After all the person
ordering the goods may be in the United States, but may be ordering from a
67
company in France, such as a case of wine, and tlie Internet connection may
be tlirougli yet anotlier country.
In these situations jurisdiction will have to be resolved and tliis is only tiie
first level of issues.
hi the context of Electronic commerce on the Internet, tliere aie issues
tliat we believe need to be examined and certain protections tliat must exist.
First, we believe that tlie role of financial institutions in the payment systems
mechanisms must remain paramount. Today there is a well developed body of
appropriate regulations that protects tlie average person as to tlie safety and
the soundness of their financial institution and provides assurances of the
completion of the value exchange in our system. We tliink tliis should
concern you as we move forward. Secondly, we believe it is critical that
appropriate levels of authentication be provided in order to verify the
transactions that are being requested and conducted are proper, appropriate
and authentic. Thirdly, we believe that security is a critical factor.
Electronic commerce up to this point has been appropriately controlled by
parties who themselves are at risk and therefore have appropriate security
controls in place. As we look at the Internet, its use and the global nature of
this communications body, it is apparent that appropriate security methods
must be properly developed and critical they be implemented. We also
believe that privacy is a major issue. Tliere are ever increasing concerns by
citizenry that too much infonnation about tlie individual is already available to
too many parties. Issues such as privacy must be addressed in an appropriate
fashion. If tlie consumer is to develop the confidence in tlie systems, he must
not feel that these systems are intrusive on tlieir personal life or expose tlieir
personal infonnation without tlieir control. In addition to these matters, the
ability to audit, the ability to track tlie money supply and tlie authority to tax
and enforce tlie collection of taxes mast be assured.
Today we stand on the edge of an electronic and communications
fi-ontier. We have a unique opportunity to provide needed services to our
citizens for the conduct of their daily life. These services will be at a level of
convenience and efficiency that has never before been possible. As you look
at these issues we hope that you will focus your inquiry on these matters that
concern us. Yet, we also hope that good judgment will guide you to avoid
over regulation. We do not believe that high a level of regulation should be
applied to areas which are in their infancy. We believe that you should be
concerned about these basic issues. Protections in these areas will provide
68
tlie basis for achieving tlie confidence of tlie public in tliese systems as they
develop while allowing them to direct their own course and develop in a
natural way.
10
69
The Ease of Using Ecash
Overview
Ecash has been designed for ease of use. Corisumers are given a simple "point-and-
click" graphical user interface that is simpler to use than many bank ATMs. To
demonstrate the ease of using ecash, various actual transactions involving two
customers, Alice and Bob, are shown below.
Startup and Background Operation
Once Alice starts ecash, it runs on her PC in the
background much like a memory monitor or clock
program. While ecash is running, a small window is
displayed that shows her the amount of ecash available to
spend along with an optional toolbar that allows her to
Fii;ure 1 initiate various functions.
Withdrawing Ecash from the Bank
In order to use ecash to purchase goods or services, ecash must first be available on
the payer's hard drive, just as cash is needed in a wallet to pay for goods or services in
the physical world. Withdrawing ecash is as simple as withdrawing regular cash from
an ATM. Alice simply enters the amount to be withdrawn from the bank and clicks
the "OK" button. This amount of ecash is then transferred to her hard drive. The
screen below shows the actual dialog box' used to withdraw ecash that appears when
the bank icon has been clicked on the toolbar.
, 1^. '. . ;..//./.;., .., ./ ,,,.. '^t*^fc'wa6dt»w
//■.
Otoo** acttojs
^ \<i?ittMir«w ivxtb. ecath bant sccftunt
<" 2«$><>*»t *« <>«>3*» tWtf* dctwmt
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A ^-1
Wfth*awfl«ai«t jjinno
! MA
feoaiart^ed paymcn*:: jlO
1 Caoce* 1
r C->^.:. ;/>::.'■-- .:-:.:?---..:-. --^
Tfjmspert
M«a»*|tCP/lP (online)
s
S^nlt hoJl. jbank digicash com
' Version 2.1 of the actual MS Windows ecash client is shown throughout.
70
Making a Payment
There are two ways to make a payment using ecash: responding to a payment request
issued by someone else, or initiating a payment yourself.
Responding to a Payment Request
Bob may send a payment request to Alice who has asked to buy something.
(Merchants' software will send such requests automatically.) For example, in the
dialog box below, Alice is being asked to make a payment of $0.02 to start a tic-tac-toe
game If she wants to make the payment, the "Yes" button is clicked; similarly,
clicking the "No" button will refuse the pavTnent.
f=*| Ecaafi request
j-lnciwBng pjyuMutf lequest
I Shoe accaua «): Ttetactfie^tSstcAsh cten
y
W>M$
Mat.e Mi pasmtentrl W
As an ease of use aid, Alice may also instruct her system to respond automatically to
payment requests. When the policy button is clicked in the window above, the dialog
box is extended downwards as shown in the window below, and she may set the
policy under which payments are to be made automatically. This simplifies certain
repetitive payments.
:;; i: SJwfi «c£flont JO: Ttclaclwe^idigtcjtth can
Y-
ili^^attc^ 1 Make tiwjt i>.ty»fiflt>i tio
1 ^- 1
ilij:, |x shop -accowtf H> fx M^awownt
<|5 00
i|;;:i:- P payfltent dttauot T aotWBtU<
j:.::
|i;:j: :~ fwymeiH ttescftpSon j5c tf passncrrti
|,0
:>>xo:-:->:.>:.:v^:.:-;-:o:-:^:.:.;v^>^-:-::.:->:-;->:v^v^;v^^.:-:o:.:.>:.>:.:.>:.:.>:.>>>>:.>:.>:.;.>x
$35.i#-'j^|
Figure 4
71
Initiating a Payment
To make an unsolicited payment directly, Alice brings up the payment dialog box
from the toolbar and fill? in the blanks, much li' . r/ : , i , he\ \
. Omww acHon
CcB$ii psyreEot
S«t«iet) paynem
- f^ayttcfit jia^d
AccAWtlD. 1 bob^xj^z c
om
■T
!fci«»int.jl 00
^ctCTf^km. Money for
unch
- --:
#^ 1
tared 1
Ir»n«^od
K^hO^lTr.fVlt'lonl
nt|
\il,
Hostnsmtt. |
Figure 5
Receiving Ecash
When Alice pavs Bob, he has the option of depositing ecash into the bank or retaining
ecash on his hard drive for future use, as shown in the dialog box below.
PaiSKior <JeKaip<ion: Mooe* for tunch
Actxptfm
y- ;
|^^;| Ak«p« *« p««B«?j ^&>
1 Ve, II
$».98
!d
Figure 6
Just as Alice could set a policy for automatic response to payment requests. Bob can
also set a simple policy for automatic handling of incoming payments, as shown
below.
$33^8
a
Y
JCIIO
72
Depositing Ecash in the Bank
Ecash can, of course, be deposited in the bank. Again a simple dialog box is used.
(Actually this is the same box as used in Figure 1 for withdrawals.)
=1 Ecash <J<;poK)*
Chocse aotam
C l^ta>^aw tr0« flcMh book accwsnt
fiata^o^cn iJetadt
Oaiwwft^wwnt- JIODH
&ttitiVA&e4 pi^netilx 1 0
>Y-t
)4,«,o4.j TCP/IP (ortme)
BankJKMt banl^digicaih i
Receipts and Records
Ecash automaticaUy tracks withdrawals, payments, receipts, and deposits, creating
various electronic statements
H Ecatfi paytaeM tog
i
• 1 t0.02 Maj.3111:«lok Tic-Tac-Toe
w* 2 $1.00 MafTinOok Money for lunch
■^ 3 $10 00 Maji31 ll:4Gok [caih deposit]
J
4^
ffkm -
....^
^ ¥
PaswEfftte- bamuSi^cAti'aim
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j OetonpJKWt Icflih de^ss^i
Bate. Wed Mar 3J H-'IS'^IISaS
1 Sanc^S paymcm j j Bejend ;»$»«* |
1 a"^, 1
73
How Ecash Works Inside
Overview
Like banlcnotes, ecash can be withdrawn from and deposited to transaction demand
deposit accounts. And like banJcnotes, one person can transfer possession of a given
amount of ecash to another person. But unlike cash, during customer-to-customer
transfers, banks will have an unobtrusive but essential role to play.
The following examples explain how a withdrawal works, followed by a payment to a
retailer. Combining these two transactions, it is then illustrated how the system can
be configured so that the customer perceives that ecash is paid from person to person
without involving any accounts. Finally the withdrawal is explained in greater detail
to illustrate the "blind signature" concept, which is the foundation of the privacy
feature.
Simple Withdrawal of Ecash
Figure 10 shows the two participants in the withdrawal transaction: the bank and
customer Alice. Also shown are the digital coins that have been withdrawn from
Alice's account at the bank and are on their way to her PC. When they arrive, they
will be stored along with the few coins left over on her hard disk.
Although of course no physical coins are involved in the actual system, the messages
sent include strings of digits, each string corresponding to a different digital coin.
Each coin has a denomination, or value, so that a portfolio of digital coins is managed
automatically by Alice's ecash software. It decides which denominations to withdraw
and which to use to make particular payments. (The ecash software contacts the bank
in the rare event that change is needed before a next withdrawal, to let it restructure
its portfolio of coin denominations.)
74
An Ecash Purchase
Now that Ahce has some ecash on her hard drive, she can buy things from Bob's shop
as shown in Figure 11.
Once Ahce has agreed by clicldng on the "payment request" dialog shown in Fig. 12 to
pay a certain amount to Bob's shop, her ecash software chooses coins with the desired
total value from the portfolio on her hard disk. Then it removes these coins from her
disk and transmits them over the network to Bob's shop. When it receives the coins,
Bob's software automatically sends them on to the bank and waits for acceptance
before sending the electronic goods to Alice.
Alice's Bank
Alice the Payor
C^
To assure that each coin is used only once, the bank uses the serial number of each
coin to point to where it should be stored in the spent coin database it maintains. If
the coin serial number is already stored at that position, the bank has detected
someone trying to spend the coin more than once and informs Bob that it is wortfiless.
If, as will be the usual case, no serial number has been recorded at that position, the
bank stores it at that position and informs Bob that the coin is valid and the deposit is
accepted.
Person-to-Person Cash
When a consumer receives a payment, the process could be the same. But some
people may prefer that when they receive money, it be made available on their hard
disk immediately, ready for spending — just like when someone hands them a five
dollar bill. This user preference can be realized as depicted in Figure 12.
The only difference between this payment from Alice to another consumer, Cindy,
and the one Alice paid to Bob's shop in Figure 11, is what happens after the bank
accepts the cash. In Figure 12, Cindy has configured her software to request the bank
to withdraw the ecash and send it to her PC as soon as the coins are accepted.
(Actually Cindy's bank will check with Alice's bank to make sure that the coins
deposited are good.) When Alice sends Cindy five dollars, that money is immediately
available to spend from Cindy's PC.
75
:„>"
How Privacy Is Protected
In the simple withdrawal of Figure 10, the bank created unique blank digital coins,
validated them with its special digital stamp, and supplied them to Alice. This would
normally allow the bank at least in principle to recognize the particular coins when
they are later accepted in a payment. And this would tell the bank exactly which
payments were made by Alice.
By using "blind signatures," however, a feature unique to ecash, the bank can be
prevented from recognizing the coins as having come from a particular account. The
idea is shown in Figure 13. Instead of the bank creating a blank coin, Alice's computer
creates the coin itself at random. Then it hides the coin in a special digital envelope
and sends it off to the bank. The bank withdraws the requested dollar from Alice's
account and makes its special "worth-one-doUar" digital validating stjimp on the
outside of the envelope before returning it to Alice's computer.
PO?|
When Alice's computer removes the envelope, it has obtained a coin of its own choice,
validated by the bank's stamp. When she spends the coin, the bank must honor it and
accept it as a valid payment because of the stcimp. But because the bank is unable to
recognize the coin, since it was hidden in the envelope when it was stamped, the bank
cannot tell who made the payment. Thus the blind signature mechanism lets the
validating signature be applied through the envelope. The signer can verify that it
must have made the signature, but it carmot link it back to a particular object signed.
How It All Works with Numbers
The coins form a close analogy to the way it actually works in the ecash software.
When Alice's computer creates a blank coin it chooses a random number. The bank's
validating stamp on the coin is a public key digital signature formed by the bank with
76
the random coin number serving as the message signed. Checking the validity of a
coin involves the verification of the digital signature using the bank's corresponding
public key. The blinding operation is a special kind of encryption that can only be
removed by the party who placed it there. It commutes with the public key digital
signature process, and can thus be removed without disturbing the signature.
How Funds Flow
While for the consumer ecash is functionally equivalent to cash, to a bank its
properties are somewhat different.
As can be seen in the top of Figure 14, the first step in each case is when value comes
out of a customer's account. In an ATM transaction, the currency given to the
consumer is a reduction in vault cash; in an ecash withdrawal, however, the value is
moved within the bank and becomes an ecash liability that wiU be reversed when the
ecash is presented for deposit.
The second step is the spending of the value. Here cash and ecash are very similar. In
each case the merchant (or other party receiving it) has the option of accumulating or
depositing it, as detailed later with reference to Fig 15.
When the merchant takes the final step and deposits the cash, it results in an increase
in vault cash. A deposit of ecash reduces the ecash liability and increases deposit
liability.
[
Consumers' Bank Deposits
J
i
"
Branch
ATM
s
Digital
Branch
?
Reduction in Bank
j Valu
3 Leaves
Bank
X
Increase in
Vault Cash
,
Ecash Liability
Currency in
Wallet
Currency on
Hard Disk
'
Cons
umer Pay
ment
'
Merchant
\
Increase in Bank
Vault Cash
'
, Value Returns to DDA,
\-
Reduction in
Ecash Liability
(
Demand Deposit Accounts
)
Figure 14
77
The chart below shows in more detail the difference in the actual transaction path for a
cash payment and an ecash payment, particularly in the case where they are made
from customer to customer. While the main difference is invisible to the consumer, it
is necessary to protect the integrity of ecash.
• TTie left side of the chart shows a cash payment from Customer X, who may
have originally withdrawn it, to Customer Y. The payment goes directly from
X to Y's wallet, and at some later time Y has the option of either depositing the
cash in the bank or using the cash to pay Customer Z. The process continues
indefinitely until the cash is deposited.
• The right side of the chart shows an ecash payment from X to Y. Before the
pavment is accepted, Y verifies the validity of the ecash with the issumg bank,
the main step which is not necessary with cash. Customer Y chooses at this
time whether to store the ecash or deposit it immediately in the bank. If Y
chooses to store the ecash, it may then later be used to pay Z, and so on.
Customer X
1
Deposit
1 ■
/'^ Deposit ^\
Store
"V or Store?^^
Hard
Disk
1
Custome
rY
Custo
merZ
Branch/ Digital
ATM Branch
78
'•■*■■• ELECTRONIC
■■■■■■ PAYMENT
•■■■■• SERVICESJNC.
DAVID M. VAN LEAR
Chairman and Chief Executive Officer
Electronic Payment Services, Inc.
David Van Lear is chairman and chief executive officer of Electronic Payment Services, Inc (EPS),
Wilmington, Delaware
Before his appointment as EPS chairman. Van Lear was a member of the EPS board of directors since
its creation in December 1 992, and chairman and chief executive officer of Banc One Corporation's
Regional Affiliate Group from July 1992 to August 1993 From 1988 to 1992, he served as president
and chief executive officer of Banc One Services Corporation, the technology services division of Banc
One. He joined Banc One in August 1986 as senior vice president, responsible for product support.
Prior to joining Banc One, Van Lear held positions as senior executive vice president of American
Savings & Loan in Los Angeles, and president of the Financial Services Group From 1969 until 1984,
he was with Norwest Corporation, serving as president of Norwest Information Services, Inc. from
1981 to 1984
Van Lear holds a B.S in finance from San Diego State University He is also a graduate of the Amos
Tuck Executive Program of Dartmouth College and the Colorado Graduate School of Banking
Van Lear was selected as Chief Information Officer of the Year for 1991 and was featured in
Information Week magazine.
79
• - '■•««*« ELECTRONIC
• - > « * « ■ aM PAYMENT
■ • -•>•««■ SERVICESJNC.
ELECTRONIC PAYMENT SERVICES, INC.
Introduction
The formation of Electronic Payment Services, Inc (EPS) has indelibly changed the face
of the electronic funds transfer industry. Established in December 1992 as a joint venture
between four major financial institution investors — Banc One Corporation, CoreStates
Financial Corp, KeyCorp and PNC Bank Corp — and with the addition of National City
Corporation in 1995 — the Company has become one of the leading electronic transaction
processors in the United States, with 15 billion transactions annually EPS is
headquartered in Wilmington, Delaware and serves as the parent company for BUYPASS
Corporation and MONEY ACCESS SERVICE INC A privately-held, for-profit
company, EPS provides unsurpassed expertise in all components required to establish and
operate automated teller machine (ATM) and point of sale (POS) networks and related
systems The unique structure and vision of EPS allows it to make powerful investments
in the research and development of new products and services, and positions the Company
on the leading edge of industry capabilities Combined with extensive experience and
commitment to customer satisfaction, EPS is unequaled in the electronic transaction
services arena
80
• - ->•««■« ELECTRONIC
• ' «*>«««« PAYMENT
• • - • ■ m m m m SERVICES,INC.
ELECTRONIC PAYMENT SERVICES, INC.
Background
Since the formation of Electronic Payment Services, Inc (EPS), the dynamic business
style of the Company has redefined the fijture of the electronic fiinds transfer (EFT)
industry The progressive structure of EPS, highlighted by the investors' common vision
to operate delivery systems as a business — not as a utility — is driving the industry to
abandon the non-profit model of operation This has dramatically accelerated a trend
towards consolidation The cultural and philosophical fit of the investors, a shared focus
on customer service, and the consolidation of developmental resources, has enabled EPS
to deliver an increasing array of innovative products and services to financial institutions,
merchants and utilities The ultimate goal of EPS is to be the premier provider of
electronic transaction processing services The key to EPS' success is its unique ability to
carry the legacy of the founding organizations, and combine that depth and expertise with
breakthrough vision and a continuing commitment to industry excellence Highlighted
among EPS' early milestones is the establishment of the Wilmington, Delaware
headquarters; the creation of its 70,000 square-foot, state-of-the-art data center in
Wilmington, the assembly of a talented, diverse management team; the addition of many
major new customers, extensive growth in the Midwest, and the addition of a new
investor Through its subsidiaries, BUYPASS Corporation and MONEY ACCESS
SERVICE INC, EPS offers high-quality, cost-effective transaction processing
capabilities The 900 associates of EPS share the belief that it's not just the products, but
how those products are delivered, that differentiates EPS With the infrastructure now
established, EPS will continue to make strategic investments to build for the ftiture The
Company will seek additional investors, identifying a select group of financial institutions
that will fijrther strengthen EPS' prominent position Innovative new products will be
introduced, headlined by the 1 996 introduction of the stored value card using smart card
technology. The smart card, which utilizes an embedded micro-chip to store value
electronically, will be used in place of cash and coins for a multitude of retail purchases
less than $20 An industry leader in smart card technology, EPS is the first company to
receive Federal Reserve Board approval to provide processing for this product. And as a
member of the international consortium formed by Visa International, EPS will participate
in the development of worldwide standards for the stored value card.
81
r ELECTRONIC
f PAYMENT
SERVICESJNC.
BUYPASS CORPORATION
Background
BUYPASS Corporation is a major third-party point of sale (POS) processor and the
leading debit POS transaction acquirer in the United States, with access to most major
automated teller machine (ATM) networks Headquartered in Atlanta, Georgia,
BUYPASS pioneered industry-tailored technology for electronic data capture and fLinds
settlement It developed customized applications for petroleum, convenience store,
supermarket, financial institution, hospitality, general retail and utility customers
nationwide Services include host system-based POS terminal programming and
management, settlement and adjustments, links to check authorization services, and
electronic funds transfer (EFT) gateways BUYPASS' groundbreaking achievements and
experience over the past decade are unmatched It was the first third-party processor to
pay merchants electronically, provide on-line debit POS transactions, access multiple
networks, process ACH private label debit cards, and support a complete fleei
management system. Through its Integrated Systems unit, BUYPASS has installed more
electronic payment systems in supermarkets nationwide than any other processor
BUYPASS offers an extensive array of integrated EFT/POS solutions for industry-
standard platforms in the multi-lane retail and hospitality environments, including
electronic cash register and property management systems With the formation of parent
company Electronic Payment Services, Inc (EPS), consolidation and new business at
BUYPASS in the early 1990s doubled the number of annual electronic authorization, draf^
capture and settlement transactions processed The Company operates 125,000 data
capture terminals and processes 600 million transactions annually BUYPASS' delivery of
products emphasizes flexibility, integrity, continuous improvement, innovation and service
This uniquely positions the Company to respond to the explosive growth in debit POS
purchases Moving forward, the priorities of BUYPASS are to continue to develop
market-specific technology applications; expand transaction services to include a broader
range of data movement to improve customer access to business information, maintain the
leadership position in integrated EFT/POS solutions for new and existing high-end
systems through strategic cooperation with various hardware manufacturers; identify and
implement efficiencies to support highly competitive pricing, expand current services to
include additional data transmission applications such as electronic benefits transfer, and
increase the delivery of host-to-host gateway services
82
r ELECTRONIC
' PAYMENT
SERVICE5,INC.
MONEY ACCESS SERVICE INC.
Background
MONEY ACCESS SERVICE INC (MAS), headquartered in Wilmington, Delaware, is
the operator of the MAC® network A super-regional electronic funds transfer (EFT)
network, the Company leads the United States in the delivery of branded financial, retail
and information transaction services as the largest processor of switch transactions.
Currently, the network is comprised of 1,700 financial institution members, 18,200
automated teller machines (ATMs), 150,000 point of sale (POS) terminals, and 32 million
cardholders in 34 states Processing 900 million switch transactions annually, MAS is
three times larger than the nearest competitor With the formation of parent company
Electronic Payment Services, Inc (EPS), the MAC network merged with regional
networks Green Machine, OWL and Trinet, and incorporated Banc One's proprietary
Jubilee network under the MAC brand As the integration of these networks continues in
1995, the strongest capabilities of each network will be combined to create the "best of
the best" under the MAC brand The next step will be the consolidation of the products
and processing platforms of each network The synergies created by the merger will allow
the MAC network to invest substantially in the research and development of innovative
new products and services MAS currently provides a multitude of enhanced cardholder
services, including MAC Check®. MAC Info® and MAC Phone® This new generation of
self-service banking offers an array of capabilities including check cashing to the penny,
split deposits, bill payment and loan calculations MAS provides a complete value-added
package to customers, including marketing and consultative services, ongoing training,
regional and annual conferences, and the ability to customize products and services The
direction of the MAC network is based on more than depth of expertise, it is customer-
and market-driven The MAC Advisory Council, consisting of a representative group of
financial institutions, meets on a quarterly basis to discuss network members' needs and to
provide a forum for input As the MAC network moves into the fLiture, members will see
the implementation of advanced multi-site data center capabilities, featuring the most
robust disaster recovery system in the United States Network members will also benefit
from leading edge product development and technology, continued emphasis on the POS
business and home-based banking services, consistent investment in the MAC brand, and a
renewed focus on exceeding customer expectations
83
Reprinted frorr,
AMERICM BMKER
The Daily Financial Services Newspaper
Thursday, April 6. 1995
Network Pushes Ahead
With Smart Card Trial
Trial Run
For a New
Payment
System
Jennifer Mariner of
Electronic Payment
Services Inc. uses a
smart card to buy
postage stamps, demon-
strating "electronic
purse" technology that
the company expects to
be deploying in Delaware
by early next year.
84
EPS Delaware Smart Card Test
Pictured above
Two zlfM:ode areas in Wilmington
Distribution through 600 bank branches
• CoreStates •National •
Financial City
•Keycorp 'Banc One
Partners for pilot are undisclosed
Visa U.S.A. Olympic
Smart Card Project
BB
1 Atlanta
^^^^H 1 million (disposable and rechargeable)
m
1 5,000
^^^^H Summer 1996
■
1 'Rrst Union
1 •NationsBank
1 •Wachovia
By VALERIE BLOCK
Electronic Payment Services Inc. is forging ahead with its
smart card trial in Delaware, undaunted by the fact that other
tests — like Visa U.S.A.'s plan for the Atlanta Olympics next
year — will be far bigger
Wilmington-based EPS, best known for operating the MAC
automated teller machine network, began an in-house pilot test
in February that will act as a model for the rollout to two New
Castle County zip codes in early 1996.
"Before we roll out, we want a thorough understanding of
consumer needs and perspectives" relating to the new chip tech-
nology, John F. Beahn, chief marketing officer, said recently in
the company cafeteria while eating a lunch purchased with one
of the stored-value cards.
The cards, which have been distributed to the 400 employees
at EPS" headquarters, function at nine vending machines, six
cash-to-card loaders, three stamp machines, three public tele-
phones, and the cafeteria.
Although the company has been running a 4,000-employee
test at CoreStates Plaza in Philadelphia since 1991. the newer
program includes updated technology that will mirror the
Delaware rollout, said Mr. Beahn.
Upon entering the main building of the EPS compound, on 26
green acres just outside downtown Wilmington, employees can
load value onto their cards at the cash-to-card dispensers in the
THE CARD USES a microcomputer chip from France's Gemplus
to track cash-equivalent debits and credits.
electronic banking center.
The microcomputer chips in the cards, manufactured by
Gemplus of France, track the cash-equivalent debits and credits.
The initial cards were free; an extra card costs $1 ,
Karen Strauss, technology training manager, loads a weekly
cash allotment onto her card and carries it in her employee iden-
tification pouch, which clips onto her clothing.
"We do a lot of running around here," she said while standing
in line at the cafeteria. Now "I don't have to go upstairs to get
money" for lunch, she said. "It's right here."
While employees are learning about the convenience of stored
value. EPS is ironing out the kinks for the larger project, previ-
ously scheduled to begin in October but delayed until early next
year, said David M. Van Lear, chairman and chief executive offi-
In that trial, 50,000 cards issued by a still undisclosed group
of participating banks will be linked to consumers' checking
accounts. Users will be able to add value through automated
teller machines and to purchase goods from about 150 mer-
chants.
In a recent presentation, EPS executive Bernard David listed
banks heavily represented in New Castle County: Bank of
Delaware, Beneficial National Bank, Delaware Trust Co.,
Mellon Bank, and Wilmington Trust Co.
Until only a month ago, EPS' program was regarded as the
most ambitious stored-value pilot planned for the United States.
But Visa's 1996 Olympics program, led by First Union
Corp.. NationsBank Corp., and Wachovia Corp., "has
already overshadowed" EPS. said Liam Carmody. president
of Carmody & Bloom, Woodcliff Lake, N.J.
"The Atlanta pilot will be very visible; the Olympics get
a lot of attention," the consultant said.
Visa said at least one million disposable and recharge-
able cards will be distributed during the Olympics, for use
at 5,000 participating merchants.
Mr Van Lear, 53, chairman of EPS for the past year and
a half said the launch in Atlanta would not affect the plans
of EPS, a joint venture of Banc One Corp.. CoreStates
Financial Corp., Keycorp. National City Corp., and PNC
Bank Corp.
The technology to be used in die Olympics effort "is not
the long-term solution," said Mr. Van Lear, a former Banc
One executive.
Diane Wetherington, senior vice president of chip card
85
FOUR HUNDRED Electronic Payment Services employees are using an experimental cash card at the headquarters cafe-
teria and elsewhere in preparation for a 50,000-user pilot test.
marketing for MasterCard International, .said as much last week
when MasterCard said it would launch its own slored-value pilot
in Australia in the fourth quarter
Visa's pilot "is an event-relaled situation," Ms. Wetheringlon
said. "What's more interesting for us is an ongoing relationship
with the cardholder, as opposed to something cardholders can
use for only four weeks."
First Union said it is planning an open system, scheduled to
kick off in Atlanta this September with 30O,{HK) chip ATM cards
issued to residents. Bui some industry observers doubted First
Union could meet those goals.
Mr. Carmody pointed out that various competitive approach-
es "can come logelher." with the initiatives eventually building
off each other Mr Van Lear said EPS will be on the leading
edge, having "influence over the marketplace." He added that
international standards must be set so merchants the world over
will be able to use the same equipment to accept the cards.
To that end. EPS is involved with the International Standards
Organization, the American National Standards Institute, and
Visa's international stored- value working group.
EPS has yet to join the Smart Card Forum, a multi-industry
group promoting testing and standardization, though there have
been rumors that EPS is opening up to the possibility. It was con-
cerned about sharing results of its advanced work with competi-
tors.
The EPS trial will "prove a lot of stuff' about what you can
do with the card, said Mr Van Lear. "We'll compete on the appli-
cation side, getting banks to issue our cards" rather than those of
competitors, he said. The banks will "belong to our network."
Mr. Van Lear said the delay until 1995 was partly to ensure
that the technology will not be quickly supplanted by something
more advanced.
The Delaware rollout will emphasize vending machines,
transportation, and retail points of sale. Some activity may eat
into debit card volume. Mr Van Lear said.
Other stored-value programs around the world, like the
Danmoni program in Denmark, focus on small-change purchas-
es such as newspapers, phone calls, and parking meters, and are
said not to cannibalize debit or credit cards.
"We're going for ubiquity." said Mr. Van Lear. "We don't
want multiple cards, we want multiple applications (on one
card]. We're going for the highest value."
Mr. Van Lear foresees considerable interest in vending
machine areas in supermarkets, selling everything from stock-
ings to batteries, six-packs of soda to sunian lotion.
Danyl Corp.. a Schlumberger division headquartered in
Moorestown, N.J.. is manufacturing the smart card readers for
the pilot. Peter J. Truscello, Danyl's president, agrees there is a
big market for unattended vending machines.
Mr Van Lear said merchants will embrace the technology.
86
which would help reduce labor costs by shrinking lines in super- merchants" in Delaware, who see the new technology as cheap-
markets, er than cash. Gas stations, toll collections, and fast food are other
But Dan Shanahan, vice president, point of sale for Tops areas where the system should be popular, Mr. Van Lear said.
Friendly Markets in Buffalo, said, "People like variety. We have As the technology catches on, issues regarding ownership of
32 [shelf] feet of stockings — that's very wide. You'd need a big money stored in the cards but never spent — sometimes called
vending machine." float or breakage — will prove complicated.
Vending machines can work for items like a pack of gum, he Mr Shanahan said banks shouldn't control electronic money
said, but for many things "people love to shop." once it's out the door. But Mr Van Lear said money stored on the
Mr. Shanahan said the stored-value concept would be most card hasn't exactly left the bank until its spent,
useful at express registers where people insist on using cash. "It's a transaction waiting to occur." he said, adding that the
Still, Mr. Van Lear said, EPS got "very positive reaction from settlement questions will not be answered overnight. D
1 ELECTRONIC
1 PAYMENT
SERVICES,INC.
87
S^e JfeUr Jlork Stmci5
Business Day
nlESDAY. SEPTEMBER 6. 1994
An End to the 'Nightmare' of Cash?
by SAUL HANSELL
The relentless march of lech-
nolog>' into the smallest details of
everyday life may be reaching the
final frontier: the advent of the
electronic penny.
Banks, credit card companies
and even the governments of some
countries are racing to introduce
"electronic purses." wallet-size
cards embedded with rechargeable
microchips thai store sums of
money for people to ase instead of
cash for everything from buying
fast food lo paying highway tolls.
With 80 percent of the 360 bil-
lion transactions in the United
States each year paid for with cash,
and 90 percent of that 80 percent
involving amounts of less than S20,
the theoretical appeal of the elec-
tronic purse, or siored-value card,
seems clear.
Cash Is 'Inconvenient*
"What consumers want is con-
venience, and if you look at cash.
it's really quite inconvenient." said
Donald J. Gleason, president of the
Smart Card Enterprise unit of Elec-
tronic Payment Services, known as
EPS, which runs the MAC cash
machine network. "And for mer-
chants, cash is a nightmare. It is
expensive to handle, count and de-
posit, and they have slippage.
which is their way of saying theft. "
EPS has the most advanced
plans for the introduction of a
stored-value card in the United
States, starting in Delaware next
year. The company, which is based
in Wilmington. Del., and owned
by half a dozen large Northeast-
ern and Midwestern banks, hopes
to attract other banks and auto-
mated teller machine, or ATM.
networks around the country to join
in and build a nationwide electronic
purse system.
Both Visa International and
Mastercard International are also
working on ventures to take the so-
called smart card, introduced a de-
cade ago, into the bold new world
of information technology
A pocket card that carries a
microchip is. in effect, a small
computer— a more advanced ver-
sion of the cards with magnetic
stripes used by people in New York
and Washington to pay for subway
fares.
In recent years, some tele-
phone companies in other countries
have marketed smart cards that
were charged with a set number
of calls. The Slate of Ohio is de-
veloping a smart card system for
the electronic delivery of welfare
benefits. Other uses under discus-
sion range from electronic drivers
licenses lo the storage of medical
records.
"Think of il as your PC,
which you bought for office appli-
cations, then added other software
later." Ronald A. Braco. senior
vice present for electronic bank-
ing at Chemical Bank, said of the
smart card, which Chemical is test-
ing in its employee cafeteria. "We
can download other applications to
the card at an ATM or over the
telephone."
But the first application that
experts say will widely deploy
smart cards will be the electronic
purse.
After it is loaded with money,
at an ATM or through the use of
an inexpensive special telephone,
the electronic purse can bo used lo
pay for. say, candy in a vending
machine equipped with a card
reader.
The vending machine need
only verify that a card is authentic
and there is enough money avail-
able for a chocolate bar. In one
second, the value of the purchase
is deducted from the balance on
the card and added to an electronic
cash box in the vending machine.
The remaining balance on the card
is displayed by the vending ma-
chine or can be checked at an ATM
"What consumers want is convenience, and if you
look at cash, it's really quite inconvenient." said Donald
J. Gleason, president of the Smart Card Enterprise unit
of Electronic Payment Services.
or with a balance- reading device-
Such a system would virtually
eliminate fumbling for change or
small bills in a busy store or rush-
hour toll booth, and waiting for a
credit card purchase to be ap-
proved.
And when the balance on an
electronic purse is depleted, the
purse can be recharged with more
money. As for the vendor, the
candy machine's receipts can be
collected periodically in person—
or. more likely, by telephone— and
transferred to a bank account
The cost and timing are the
keys. While the technology has
been available for a decade, the
cards have been relatively expen-
sive, from $5 to $10. Now the
cards cost $1. and special tele-
phones that consumers could in-
stall at home to recharge the cards
are projected to cost as little as $50.
A simple card reader would cost a
merchant less ihat $200.
What is holding the cards
back? Long-range planners in the
88
banking industry see the weaning
of small businesses and consum-
ers from cash as tbe last step to
closing many expensive branches
and conducting virtually all busi-
ness by telephone, through cash
machines and perhaps home com-
puters,
"Banks estimate that 4 percent
of the value of cash that is depos-
ited gets eaten up in handling
costs" said Michael C. Nash, a
senior vice president with Visa In-
ternational.
Despite the advantages of
electronic purses, some analysts
say the banks face a struggle con-
vincing consumers that they need
another type of card.
One reason is that more people
are using credit cards for more
small purchases than in the past.
That is in part because credit card
terminals are increasingly capable
of handling transactions faster and
because of the proliferation of
cards that offer bonuses like fre-
quent-flier miles for purchases.
And in many areas, consumers
have just begun to warm to the
debit card, which works like a
check, making purchases by de-
ducting money from a customer's
bank account.
Another reason is that in many
electronic purse plans, a lost card
is the same as lost or stolen cash:
it's gone.
Promoters like Mr. Gleason
counter that customers can load up
their card with only as much
money as they feel comfortable
carrying, refilling them every night
by telephone.
"Could anything be safer than
loading value onto your card m the
convenience of your home or of-
fice?" he asked.
Ambition Abroad
Matters are far more advanced
abroad. Banking groups in Den-
mark, Portugal, Singapore and
other countries are sponsormg elec-
tronic alternative to small change.
And two of Britain's largest banks.
National Westminster Bank P.L.C.
and Midland Bank P.L.C, along
with British Telecommunications
P.L.C. are about to mtroduce an
especially ambitious system known
as Mondex, which they hope to es-
tablish as a worldwide system of
cards that can be loaded with five
currencies at one time.
An elaborate trial ofMondex.
mvolving 40.000 card holders and
1.000 merchants in Swindon, En-
gland, is scheduled to start next
year; lis debut is expected in 1996.
The most extensive deploy-
ment of the technology so far has
come in Denmark, where a con-
sortium of banks and telephone
companies, known as Danmont,
has issued more than 150.000
slored-value cards, aimed at very
small transactions like those at
parking meters and soda machines.
One of the most popular applica-
tions has been in laundromats,
which have found that the cards
reduce theft and vandalism and in-
crease sales.
"Before, people would only
have enough coins for two ma-
chines, color and white." said
Henning N. Jensen, managing di-
rector of Danmont. "*Now they
split the colors into hot and cold. "
Danmont makes money by
earning interest on the money it
holds on the cards, called the float,
and by charging vending machine
owners who use die system about
3 cents a transaction. Bankers in
the United States said merchants
would be willing to pay more, per-
haps 10 to 15 cents, for the privi-
lege of handling less cash. And
they hope to charge consumers a
monthly or annual fee to use the
card.
Home Shopping Applications
Some American bankers say
the security of smart cards will
make them most useful for pay-
ments on electronic home shopping
and video services.
"As more and more people do
business on the Internet, we have
to look for how you pay for
things." said Catherine Allen, a
vice president in Citibank's tech-
nology office and the head of the
Smart Card Forum, an industry
group, "The smart card allows me
to identify myself securely."
Citibank has introduced a tele-
phone with a computer screen and
a smart card reader for identifica-
tion in its home banking service.
The bank expects the phone to
eventually be used to add money
to electronic purse cards.
But Mondex has still another
wrinkle: privacy.
Unlike most other electronic
purse systems. Mondex, like cash,
How Electronic Purses Work
Electronic purses work like electronic cash. Consumers transfer
money from their bank accounts on to cards embedded with
computer chips and then carry them around to use like cash. Using
them is (aster than using a credit or a debit card, but there are risks.
BANK
electronic card
to consumer.
CONSUMER
loads card
with money
using an A.T.M. or a
telephone equipped
to read the cards.
Bank collecls usage fee
CS^
MERCHANT
terminal that
deducts money from
the card at the
time of purchase.
Merchant uses
card-reading
telephone
yj^^ to make
bank
deposits.
Pros and Cons of Electronic Purses
FOR CUSTOMERS
■ Transactions in a second; no
■ fi^oney on card does not earn
need to wait for change.
interest.
■ Eliminates the need for exact
■ Unlike credit cards, no
change at vending machines
replacement if lost or stolen
and pay phones
■ Unlike cash, bank may charge
■ Card can be recharged at
fee for use of card.
home by a special telephone.
■ Unlike checks, no paper trail.
FOR MERCHANTS
■ Eliminates the cost of handling
■ New equipment (card reader)
cash and the risk of theft.
required.
■ Transaction fee is less than for
■ Transaction fee
credit cards or debit cards.
■ Devices that read the cards
don't need to be plugged into a
phone line
FOR BANKS
■ Fees from merchants and
■ Expense of setting up system
consumers
and modifying automated teller
■ Can invest the money carried
machines.
on cards until it is spent
■ Risk of fraud.
■ Reduced use of cash means
■ l^ay encourage customers to
reduced need tor branches
switch from credit cards, which
are more profitable.
is anonymous. The banks that is-
sued Mondex cards will not be able
to keep track of who gets die pay-
ments. Indeed it is the only sys-
tem in which two card holders can
transfer money to each other.
While many bankers are con-
cerned dial die system will be left
open to fraud and abuse, Mondex
executives say anonymity and flex-
ibility are vital to acceptance.
■^if you want to have a prod-
uct that replaces cash, you have to
do everything that cash does, only
better." Mondex's senior execu-
tive, Michael Keegan said. "You
can give money to your brother
who gives it to the chap that sells
newspapers, who gives it to char-
ity, who puts it in the bank, which
has no idea where it's been. That's
what money is."
Copyright © 1994 by THE NEW YORK TIMES COMPANY, Reprinted by permission.
89
THE FUTURE
Cover Story
In his pmsmped smt and wire-nmmed glasses. TVnoihy L.
Jones looks even- bit the traditional British banker. Sure
enough, he has spent a dozen years at National Westmin-
ster Bank PLC. But ask Jones what he is doing now. and
he responds with an intensity worthy of a Silicon Valley en-
trepreneur. Leaning across a table, he waxes eloquent about
his new enterprise. Monde.\. and the future of the product
he's selling: a new kind of electronic money.
Monde.x. which was launched by NatWest. is not alone:
A raft of companie> are developing their owti forms of elec-
tronic money.
knowTi as E-
cash. E-cash
IS mone>' that
moves along
multiple channels largely outside the established network of
bank.>. checks, and paper currenc\' overseen by the Federal Re-
sene. These channels enable consumers and businesses to
send money to each other more cheaply, conveniently, and
quickly than through the banking s\'siem.
Some of the E-cash players are faceless, dubious outfits
that exist in c\*berspace and can be traced only to a post-of-
fice box — in the physical world. But there are plenty of
other^. ranging from techno-savvy startups with names
such a> DigiCash and CyberCash. to corporate icons in-
cluding Mici-osoft. Xerox, and \"isa. Citicorp is even develop-
ing what It calls the Electronic Monetary- System, an entire
infr-asti-ucTure lor usmg electronic money to be issued by Citi
and other bank>.
TheM- companie> ai-e part of a mas> expenment that could
tran.'^ioi'm the way we think about money. In the process, it
could i^hange consumers" financial hves and shake the founda-
tions of global financial systems and even governments.
Digiui money is the ultimate — and inevitable — medium of
..xchange for an increasingly vnred world. With E-cash. youll
no longer need to canT a wad of bills in your pocket or fumble
for exact change. Instead, you might canT a credit -card -size
piece of plastic with an embedded microchip that you will
"load" up with E-money you buy with traditional currenc>'. Or,
you might store your digital coins and dollars — douTiloaded
over phone lines from your bank or other issuer of E-mone\' —
on your PC or in an electronic •"wallet," a palm-size device
used to store and transmit E-money.
This digital money will let you shop online, zapping money
to a merchant over the Internet, or perhaps paving for a mo-
vie on demand over an inleractive-T\' network. It also has the
potential to replace cash and checks for ever\'da\- purchases —
in stores, restaurants, or taxis that accept E-cash. Business-
es could also keep a stash of E-cash on hand for buying office
supplies, or use it to transact directly with each other instead
of gomg through banks and electronic funds transfers.
THE START OF A REVOUfTION. In many ways. E-cash. which
can be backed by any currencv* or other asset, represents the
biggest revolution in currency since gold replaced cowrie
shells. Its diversity and pluralism is perfectly suited to the an-
archic culture of the Internet and the evoUing web of net-
works knowTi as the Information Superhighway. "Electronic
commerce will literally change the way business is done
worldwide." says James G. Cosgrove. vice-president and gen-
eral manager for business multimedia senices at AT&T. "We're
about to see another revolution similar to the Industrial Rev-
olution." Adds Richard K. Crone, senior
manager in the financial -senices group at
KPMG Peat Marwick: "We're in the begin-
mng stages of the cash -replacement cycle."
But the advent of E-cash raises all sorts
of questions, most of which remain unan-
swered: Who should be allowed to issue E-
cash. and who will regulate those issuers?
How will taxes be applied in cyberspace,
which transcends physical boundaries? Who
will set the standards? How- do you ensure
that pavTnents made over the Net will be
secure? How will consumers be protected?
EARLY MONEY
_ Seashells, odd rough-hewn coins — the first money was
flexible, highly distinctive, and exchanged in
multifarious ways. Objects were gradual-
ly replaced by standardized commod-
ities such as gold and silver; and
these in turn by paper money Yet
even early currency was at
first issued by private banks,
local governments, and
others — usually backed by
gold and silver Diversi^ abounded.
90
OF MOHEY
E-cash could
transform
the world's
financial life
How will regulators police money laundering and counterfeit-
ing on private networks?
While regulators wrestle with these questions, technology-
is remaking the monetan.^ system. That's what Microsoft CEO
William H. Gates III had in mind when he bid for personal-fi-
nance software maker Intuit Inc. He saw programs such as
Intuit's as the gateway that would draw millions of consumers
onto his onhne network where they could pay bills, get finan-
cial advice, or shop, perhaps pa.\ing him for access. But the
Justice Dept. worried about Microsoft's reach, and he aban-
doned the deal on May 20.
Tough break, but it will hardly slow Gates down. Microsoft
is working with Visa on a system for securing credit-card
transactions over the Net. But that's just one piece of a
much bigger problem Microsoft is tn,ing to solve. Gates has
dozens of programmers busy devising a sweeping system. Mi-
crosoft Network, to help people do business safely in cyber-
space— or more specifically, in Microsoft's own network and
interactive^T\- systems — using a range of payment options. Mi-
crosoft won't reveal much about its E-cash plans, but. says
Nathan P. Myhrvold. Microsoft's top advanced-technology
expert, "we're ver\' interested in the area."
They should be. The stakes are enormous. Seamus McMa-
hon. a" vice-president at Booz. Allen & Hamilton, sees as
The current money system
is largely monolithic. Near-
ly all m^or countries have
a single system of national •
currencies and bank checks.
Most have elaborate infrastructures built
around commercial banks and a central
governing body such as the Federal Re-
serve Board. That entity is usually the
only facility allowed to issue money Per-
haps because of their monopoly struc-
tures, money systems tend to resist
change and innovation. Traders can move
millions of dollars around the globe at
the touch of a button. But the small
check-based transactions of consumers
can take days to clear. And chartered
airplanes physically
transport billions /
of checks around
the country eveiy
workday.
E-CASH
E-cash may be techno-
logically Ught-years
ahead of early money
But in many ways, it is
closer to seashells than
greenbacks. E-cash is
digital money that moves
through a multiplicity of
networks instead of the
current bank system. It
comes in lots of guises,
is created by lots of indi-
vidual parties, and is
backed by anything con-
stituents demand as an
accepted medium of ex-
change: gold, dollars,
yen, whatevet It is the
ultimate, and inevitable,
currency for the wired
world. Competition is in-
tense, producing rapid
innovations. Using money
downloaded to your PC or
a palm-size electronic
"wallet," you'll be able to
zap money to merchants
on the Net — or buy a
newspaper faster than
you can grab a green-
back. If you're a business
owner, you can bypass
banks and move Ercash
directly to customers
and suppUers. The ad-
vantages: convenience,
speed, cost savings. The
technology is complex,
but to the user, &cash
is as easy as pushing
a button.
91
Cover Story
much as 20?f of total household expenditures taking place on
the I-way just 10 years from now. If any operation, whether
Citicoqi or a startup such as Mondex, gained control of a
new mediurr. for even part of those exchanges, it would
have the opportimity
to charge royalties or
fees for its use and
earn interest on the
E-money sitting in its accounts. Even a tiny charge, when
applied to millions of transactions, would be highly lucrative.
E-cash could also create a competitive free-for-all. Be-
cause the Internet knows no boundaries, a company offering
E-money can gain direct access to millions of consumers and
businesses — no matter what state or countrj- they are in.
"The retail banking market will collapse and give way to
global comi>etition." says Eric Hughes, president of Open
Financial Networks, a Berkeley (Calif.) consulting firm. *Those
1 regional] separations don't work on the Internet."
WMNMC CONSUMEftS' TRUST. Governments' and central banks'
control of money flows has already been loosened, as shown by
recent cun-ency and market crises in Mexico and elsewhere.
But with the gnmlh of E-cash. money could flow in and out of
countries at lightning speed without being traced, weakemng
govei-nments' ability to monitor and tax. "Over the long haul,
this is going t" lead to the separation of economy and state,"
decUu-e^ Bill A. Frezza. president of Wireless Computing Asso-
ci;Ue> and cf>-t'ounder of the advocacy group DigiuLiberty.
TIk- gittwth of E-money could aLsf> be bad news for banks. If
other c<im|>anie.~ succe.ssfiilly offer their owTi brand of digital
cash, they could bypass banks as pnmarj' providers of consu-
mer hn;incial .senices. The compames. not the banks, might be
ciinsiimei>' hrst contact when they wanted to obtain some
lUgitai mone.v. "Banking Ls es.sential to the modem economy, but
hunk^ ;ui, nr»t." sa.vs J. Rjchanl Fredericks, senior managing di-
reciiir at -\Iontgomen' .Securities.
( 'iimmeixial banks are. of course, entrusted with the crea-
tion nf mnne.\- through the fractional reserve system. They
It-rvl "ii: m-'iv than they have on deposit, and they are the
This could
be bad news
for banks.
What if phone
companies
offered their
own brand
of E-money?
only companies authorized to
do so. If each unit of E-cash
had to be backed by a corre-
sponding unit of tr^tjonal cur-
rency, that would mean that
lending out E-cash wouldn't
create new money. But if non-
bank money suppliers started
backing just a fraction of their
digital cash with traditional
money — just as commercial
banks today keep on hand only
a fraction of the deposits on
their book-« — nonbanks. which
are largely unregulated, could
create money just as commer-
cial banks do now.
Bankers must move fast to
keep up. Ronald A. Braco,
head of electronic banking at
Chemical Bank, estmiates that
banks have less than five years
to come up with \Table E-mon-
ey products before other players carve out the biggest chunks
of the market for themselves. "No question, it's for real." says
Richard M. Rosenberg, chairman and CEO of BankAmerica
Corp. In a couple of years, "it will take off fairly dramatical-
ly." The issues now: winning consumers' trust and getting
them to change their buying habits.
The first step in that direction could be to get consumers
used to using credit cards for purchases on the Internet. Once
that happens, the thinking goes, they may be willing to start
using E-cash systems.
One of the first purveyors of a Net credit-card system is
First Virtual Holdings, run by onetime celebrity manager Lee
Stein. Stein has launched a relatively simple system using E-
mail that lets consumers use credit cards on the Internet
without fear that their account numbers will be misappropri-
!?-■:.'
The New World
Of E-Cash
Convenient and flexi-
ble than traditional money. It can be
used by consumers and businesses, and
for eventhing from buying wares on the
Internet to lending a pal five bucks.
• Banks that issue E-cash could find
it much cheaper than handling
checks and the paper records that ac-
company traditional money.
• Consumers doing business on the
Internet will find some forms of elec-
tronic money afford much greater pri-
vacy than using ordinaiy credit cards.
• Uncontrolled growth of E-cash sys-
tems could undermine bank- and gov-
ernment-controlled money systems.
giving rise to a confusing and ineffi-
cient Babel of competing systems.
• E-cash may be less secure than bank
money. Money stored on a PC could be
lost forever if the system crashes.
• E-cash could foster a have and have-
not society. Those with PCs would
have ready access to the stuff, while
those without, many of them low-in-
come consumers, would not
OATIk BUSKS DEtK
• Money laundering and tax evasion
could proliferate in stateless E-money
systems as crimiitals use untraceable
cyberdoUars to hide assets offshore.
• Counterfeiters could create their
own personal mints of E-cash that
would be indistinguishable from real
money
• If computer hackers or other crimi-
nals were to break into E-cash sys-
tems, they could instantaneously filch
the electronic wealth of thousands or
even millions of innocent consumeis.
92
ated. The card numbers are stored away on a
protected computer system and never pass over
the network. Instead, consumers register with
First Virtual by phone and receive I. D. numbers
in exchange for their card numbers. When they
want to buy something electronically, they simply
supply their I. D. number to the merchant.
First Virtual, which became the ftrst secure
payment system on the Net when it handled its
first transaction last October, is growing fast.
Stein won't disclose acti\-ity levels, but he says
volumes are increasing by 16% a week. "If you
make it simple and safe, people will use it." he
says. First Virtual has enlisted such merchants as
Apple Computer, Reuters, and National Public
Radio — which sells transcripts of programs.
Most electronic extensions of the credit-card
system, though, are built aroimd encryption —
scramblmg card numbers so they can pass safely
on electronic networks. For example, CyberCash
Inc., a Reston fVa.) startup, is cutting its teeth on
a deal with Wells Fargo & Co. for encrypted
credit-card transactions over the Internet.
Visa and MasterCard, not surprisingly, are
also working to make credit cards usable on the
I-way. Visa is, among other things, developing
with Microsoft a system using encryption technol-
ogy.' that they hope will become an industr\- mod-
el. "We want to be sure that the mdustrj- as a
whole has certain standards," says Carl F. Pasca-
rella, president and CEo of Visa us.^. Meanwhile,
MasterCard has teamed with Netscape Inc., a
makei- of security and browsing software for the
Internet, to pursue a similar goal.
WILTSHIRE EXPERIMENT. Credit-card-based sys-
tem.- have the advantage of seeming familiar
t" consumer.-;. But the card systems don't do
eventhing cash can: They're not anon>-mous.
the\ (111 not work person-to-person, and they
have cre<lit limits. They're also not suited for the
grassriiot.- economy the Internet makes pos-
sible, where any outfit or individual can sell its
ware.-, whethei' a new.sletter or a stock tip.
That'- where E-cash comes in. But E-cash
needs to be just a.- secure as credit cards for
people to use it. David Chaum. TEii of pioneer
DigiCash in Amsterdam, has done the most to solve this
problem. He has devised a clever system that uses so-called
public-key cryptography that, like encryption, makes it pos-
sible to send .-sensitive inl'ormation over the Net. But Chaum's
big breakthrough wa- "blindmg" technology', which lets the is-
siunp bank certif>- an electronic note without tracing whom it
was issued to. The result: Your E-cash. unlike an encrj'pted
credit-card transaction, is as anonymous as paper cash.
Chaum has yet to announce firm deals with companies to
issue his E-money. But in a pilot, some 5,000 consumers are
part of a DigiCash marketplace, using the equivalent of $1
million in E-money to do business with 50 companies, from
Encyclopaedia Britannica Inc. to Ricky's Junk Shop. Chaum's
technology is also at the heart of cafe, a European Commis-
sion-sponsored project to develop an electronic wallet for
pan-European use.
cafe's setup is similar to Jones's Mondex system. "Imagine
it's the same as physical mone.v, and you won't be far off," says
Jones. Mondex money will be created initially by NatWest
and a partner. Midland Bank PLC, which will then "sell" it to
customers. The E-money is loaded onto credit-card-size "smart"
cards with embedded microchips. The cards can be used in
point-of-sale terminals or fit into electronic wallets that can
CREDIT CARDS IN CYBERSPACE
"If you make it simple. . .people will use it "
I.EK STEIN. CF.O. First Virtual Holdinss
transmit money to merchants or — just as with traditional cash
but not with credit card;; — to other consumers. Mondex money
is still in pilot form, but the company has signed up 40.000 con-
sumers and over 1.000 retailers in the Wiltshire town of Swin-
don to test Mondex money beginning in July.
CyberCash. too. is e.xperimenting with E-cash in addition to
its credit-card-based system. In the E-cash system, consumers
will set up E-money accounts at their banks. Then, using pro-
prietary software provided free of charge by CyberCash,
they can go about their business on the Net. At the end of
the day, CyberCash will clear all the E-money transactions
and convert E-cash balances back to dollars.
No matter who develops the best E-cash. consumers and
businesses alike stand to reap sizable benefits. No longer will
consumers have to wait for change or scurry to automated tell-
er machines for cash — out of sight, they hope, of the nearest
mugger E-cash will let businesses carry out transactions
around the world without transferring bank funds — and they .
will be better able to reach a large population of technological- '
ly savvy, often affluent consumers. I
Moreover, because E-money is basically software, it can be ;
programmed to do things that paper money could never do. Mi- |
crosoft's Myhrvold explains that electronic money could be 1
BUSINESS WEEK ; JUNE 12 1995 69
93
Cover Story
earnoarited for special purposes, «Tth conditions on where it can
be spent. For example, a business could have an electronic ver-
sion of petty cash to be used for suppbes at an OfBce Depot —
but not a beer at the local tavern. Or parents could wire to a
college student E-mon-
ey that is designated
for rent or books.
"There will be new
forms of smart money and payment systems that can only be
done online." says Myhrvold.
Along with the opportunities, though, comes huge uncertain-
ty. Existing monetary regulations don't cover all of the poten-
tial uses of E-cash. Nathaniel S. Borenstein, a computer scien-
tist and co-founder of First Virtual, says: "One of the hardest
questions merchants ask us is. TVhen do we owe taxes?'"
That's not a tri\ial question: With E-money, the merchant
could be in Guam and the buyer in Canada, while First Vir-
lual's computers are located in Ohio. So whose sales tax do you
pay? Borenstein's advice to merchants: "I tell them to consult
a lawyer."
There's also a major potential for crime (page 78). E-money
can be easily sent in and out of a country undetected, facilitat-
ing money laundering on a grand scale. Tax evasion could be-
come a matter of pushing a button. And without foolproof
crj-ptography. counterfeiters could replicate the series of digits
that constitute.>i E-money. Governments would be hard pressed
to monitor or control stateless E-money. "Digital cash is a
threat to every government on the planet that wants to man-
age its currency." says David E. Sajaon, executive \'ice-presi-
dent of Netl. a startup that has developed a secure way to
send electromc checks across the Internet.
BATTIC OF TtC LOCOS. Even law-abiding citizens and compa-
nies usmg E-money could be nctims of sophisticated hacker
attacks. Says Colin Crook, senior technology officer for Citi-
corp: "We have to assume electronic money will be the sub-
ject of sustained attack from all kinds of people."
Another open question — and a large one — is the role of
bank.-; in the new electronic world. "E-cash will be offered by
both banks and nonbanks," says Chaum. Sure enough. DigiCash
or CyberCash could jom forces with AT4T or Microsoft just as
easily as with Citibank. Ha\Tng one of those companies dispens-
ing E-cash du-ectly to consumers could do serious damage to
bank."' main link with their customers.
Even if banks are involved, they could find other players
taking center stage. Early entrants to the E-money business
could set the operating standards for digital cash. And the non-
Where E-Cash Will Take Off
E-cash networks should flourish as the
growth of electronic purchases outstrips
that of traditional commerce
PURCHASES
BlUiONS OF DOUARS
- 19M
TRADITIONAL-
$5,150
EUCTRONIC
$245
• TV/CABlf TV
$45
• BUSINESS-TO-BUSIKESS
140
• INTERNO
Neeligible
. OTHER ONLINE COMMERCE
60
SHARE OF ALL PURCHASES
4.E
t
t400
■INCLUDES ROAiL WHOLESALE. SERVICE. AND MAIL-ORDER PURCHASES
70 BUSINESS WEEK / JUNE 12. 1995
THE FLEXIBILITY OF CASH
"Imagine it's tlie same as physical
money, and you won't be far off"
— TIMOTHY JONES. CEO, Mondex
banks could even devise systems that would make their logos
the first thing people see. William M. Handle, senior vice-
president at Huntington Bancshares, warns that banks could
become "buttons on a network operated by other entities."
Improbable? Not really. T^e a look at credit-card process-
^_^__^^^^^^^^^___^^^ ing. Twenty years ago,
banks owTied the card-
transaction-proeessing busi-
ness. Now. clo-se to 80% of
card transactions are pro-
cessed by nonbanks such
as First Data Resources
Inc.. says KPMG's Crone.
A similar erosion has
occurred in wholesale
banking, where banks
have ceded to such outfits
as General Electric Infor-
mation Services and Elec-
tronic Data Systems Corp.
nearly the entire market
for transferring payment
data to corporations, leav-
ing themselves the mun-
dane, low-margin service
of transferring money be-
tween corporations. Tbday,
says banking consultant
me ^^
strips ^H
-Jr.::
$8,500 ^1 J12.000
$1^650_J| $2,950
DATA: COMMERCE DEPT., KILIIN i ASSOCIATES
92-489 - 95 - 4
94
Edward E. Furash. although the situation is impnu-ing. few-
er than 100 banks offer full-service electronic data inter-
change, as the data part of payments transmission is known.
"We should do more of that." says Richard Matteis, head of
Chemical Banking
Corp.'s Geoserve unit.
Banks have one key
advantage; a near lock
on consumers' trust when it comes to depositing money. For
that reason, many bankers tend to dismiss the threat implic-
it in E-money. "The reason financial institutions are going to
Cover Story
win in the long nin is trust," says Kawika Daguio, the Amer-
ican Bankers Assn.'s federal representative on operations
and banking. Indeed, many E-cash makers are choosing to
partner with banks because of that consumer trust. "We've
positioned ourselves to work with the banking industry and
make sure that if there are heroes in this, it is the banks,"
says WTlliam N. Melton, CEO of CyberCash.
But Microsoft's bid for Intuit last fall gave bankers a
collective scare. And even though the deal did not work out.
banks worry that Microsoft could hook its 70 million Win-
dows customers into the electronic-commerce networks that
CALL IT E-MONEY MANAGEMENT
It's a Saturday morning sometime in
the not-too-distant future, and you
sit down at your PC to do a little
end-of-the-month planning. First, you
call up the balances from your various
accounts — credit-card, checking, sav-
ings, and E-cash — and break down
your spending by category. Oops, bet-
ter cut down on those pricey dinners.
Your investments are offsetting
some of those expensive habits — at
least you hope so. Finding out is as
eas,v as a few clicks of a mouse but-
ton, as you call up your investment
portfolio. Hnunm. it may be time to
get into a more aggressive mutual
fund. So you quickly dispatch a soft-
ware "agent" to rustle up profiles for
the top-performing funds. By filling
out an online form, you transfer
some of your holdings into a hot
overseas fund.
Just as technologj' is revolutioniz-
ing money, it is also set to transform
the way we manage our money.
"Comijle.xity has gotten beyond the
level that people can deal with," says
Scotl D. Cook, the founder and chair-
man of Intuit Inc. With programs like
Quicken. Intuit's best-selling personal-
hnance software. Cook aims to make
that comple.xity easier to deal with.
-AUTOMATIC AGENTS." Indeed, to-
day's program.-; for personal-finance
management and home banking are
giving consumers unprecedented con-
trol over their financial life. But this
IS just the beginmng. Gradually, pro-
grams are linking users to banks,
electronic bill-paying services, and a
broad array of vendors of financial
advice that is starting to be offered
onhnt. Colin Crook, head of technolo-
gy at Citibank, says software pro-
grams will be constantly at work for
you, for mstanee, using information
gleaned on the Net to optimize your
portfolio. "You're going to hand off
your personal affairs in cyberspace
to automatic agents who represent
you," says Crook.
A QUICKENING PACE
"Complexity has gotten beyond the level that
people can deal with"
SCOTT COOK. Chairman. Intuil Inc.
The competition to supply these
services will be heated. Microsoft
Corp.'s Bill Gates saw the potential —
one reason why he was willing to
shell out $2 bilUon for Intuit. With
that deal blocked by the Justice
Dept.. Microsoft is throwing its con-
siderable resources behind Microsoft
Money, a home-grown personal-fi-
nance package already offered by
Chase Manhattan and others. From
Money, Microsoft expects to link
customers to a variety of online fi-
nancial services, including electronic
bill-paying. Bank of America and Na-
tionsBank recently paid $35 million
for Meca Software, which makes
Managing Your Money. And Intuit,
for its part, has just released new
programs for selecting mutual funds
and planning for retirement and chil-
dren's college education.
Expect banks to jump into the
fray. They are sitting on a gold mine
of valuable data: their customers'
payment information. The statements
they send out, though, typically offer
little value, and consumers' credit-
card, checking and savings, and in-
vestment accounts are handled sep-
arately. "There is an opportunity to
consolidate that," says Richard K.
Crone, a banking consultant at KPHG
Peat Marwick-
With so much available to help you
manage your financial afbirs, some-
day you may be able to bag those
Saturday mornings at the computer
and instead just take a long weekend.
By Amy Coriese in New York
72 BUSINESS WEEK ; JUNE 12 1995
95
Cover Story
it is developing — with or without banks' help. If Microsoft
becomes a utility, "it will take a lot of business from the
banks." says Montgomery's Fredericks.
Now several of the
biggest banks are
pushing hard to devel-
op E-money. Citi-
bank's Electronic Monetarj' System is one of the most ad-
vanced bank offerings, although ofBcials there stress that it
is still in development. It would allow retail and business cus-
tomers of Citi— or any other bank that paid to use Citi's sys-
tem— to convert mon-
ey in their accounts to
electronic cash. Citi
customers would also
have access to a credit
line they could draw
down in E-money, just
as they would use a
credit card. Banks
"should be experiment-
ing." says Sholom Ro-
sen, vice-president for
electronic commerce at
Citi. "That's what
we're doing."
Beside NatWest and
Midland. Bankers TVust
Co. has a group dedi-
cated to electronic com-
merce. And even some
reponal banks see op-
portunities. There is
Well-'i Fargo's work
with CyberCash. First
Union Corp.. based in
Charlotte. N. C. has
created an electronic
mall for Internet trans-
action^ Even Cardinal
Bank.-;hare> Inc.. a S60T
milUon Lexington (Ky.)
bank, on May 24
formed a new subsidi-
ary. Security Fu^t Net-
work Bank, which aims
to grow into a full-scr-
nce interactive bank on
the Internet. "We'll be
a one-branch bank in
Kentucky with poten-
tial customers all over
the U.S.." says CEO
James S. Mahan III.
While it's not clear
who the players will
be 10 or even 5 years
from now. it is inevita-
ble that much E-money will originate outside the purview of
central banks such as the Federal Reserve or the Bank of
England, which are largely responsible for traditional mone-
tary regulation. And that has major policy implications.
"lb begin with, consumers using the stuff could be extreme-
ly vulnerable. When consumers lose their credit cards, they
are only liable for the first $50 of charges on the card. But for
now at least, if a consumer misplaced, say. a Mondex card, it
( would be like losing cash. Similarly, if your digital coins are
: stored on the hard drive of your PC, a system crash could wipe
■ out your electronic savings.
HIP TO HACKERS' HEISTS
" We have to assume electronic money will
be the subject of sustained attack "
— COLIN CROOK, technologv' chief, Citicorp
Electronic money also creates vast opportunities for tax
evasion, monev laundering, and other financial crime. "There is
an imaginable potential for a serious challenge to the whole po-
litical and social order." says First V'lrtual's Borenstein. "I am
not all that sanguine that the government has the control
they think they do." For people trying to avoid paying taxes to
a national government, the lure of a stateless currency would
be powerful indeed. Already. 'Mrtual currencies" serving elec-
tronic communities of people are spnngmg up on the Internet.
Then there's the issue of the volatility of money. The effects
of high-speed electronic trading have been painfully apparent m
market crises over the
past several years.
Market swings could
be magnified if con-
sumers and businesses
could send theu- money
around the globe with
the touch of a button
on a PC.
The monitoring of
national money sup-
plies will also change.
While some regulators
dismiss the issue, ar-
guing that E-money
will inevitably convert
back to traditional
money and get count-
ed, other experts dis-
agree. Martin Mayer.
a guest scholar at the
Brookings Institution,
says that he expects
the Fed to lose con-
trol of a significant
portion of the money
supply.
One of the most
pitched debates is
likely to be over pri-
vacy. As a society, we
have relied on a sys-
tem that allows us to
keep some transac-
tions private by using
cash, while others,
such as big-ticket pur-
chases, are entrusted
to a credit-card com-
pany or a bank. Com-
peting forms of E-cash
offer wildly differing
degrees of privacy:
DigiCash's E-money
offers virtually com-
plete anonymity, while
every dollar you
spend using the credit-card-based systems would leave a
trail. The problem will be balancing individuals' rights to pri-
vacy with government's need to monitor money flow and
trace criminal activity.
BREAKMC MTO IME E-MMT. More dire is the possibility of ma-
jor break-ins to E-money systems — the electronic equivalent of
penetratmg the U. S. Mint. If someone were to crack the so-
phisticated code of. say, the DigiCash system, he could start
minting unlimited amounts of his own DigiCash money.
That's why it is all the more alarming that some regula-
tors and even some central bankers still seem unconcerned
74 BUSINESS WEEK / JUNE 12 1995
96
with the advent of E-cash. After a breakfast speech to
several hundred business leaders in San Francisco last
March, Fed Vice-Chairman Alan Blinder was asked wheth-
er the Fed is studying the regulatory issues surrounding
digital cash. His an-
swer: "Digital what?"
Then, after pausing a
moment, he added;
"It's literally at the thinking stage."
Slowly, though, some regulators are beginning to explore the
concept of E-money so they can set policies. The Federal Re-
Cover Story
serve's payment-systems committee is meeting with Chaum of
DigiCash and other E-money pioneers. State tax. collectors are
looking at the issue of taxing electronic commerce. The Ftaan-
cial Crimes Enforcement Network is also weighing in. Even
the White House technology office is taking a big interest.
It's not a moment too soon. 'There's no going back," says
DigitaLibert.v's Frezza. "The genie's out of the bottle. The
Internet doesn't have an off switch." And no amount of wish-
ing by regulators will change that.
By Kelley Holland and Amy Cortese m Neu- York, with
bureau reports
PATROLLING THE BLACK HOLES OF CYBERSPACE
At first glance, the o£fer sounded
legitimate. First Bank of the
Internet began advertising to
Net browsers in March, offering a
new way to pay for goods over the
Net. By sending First Bank a check
for at least $20, cybershoppers would
get a Visa automated teller machine
banks and regulators warning them
about FBOI. First Bank CEO Vinn K.
Beigh, a 34-year-old computer tech-
nician in Des Plaines, IlL, says he
will soon pull his Net listing. But he
is still looking for a way to cash in
on the wave of electronic commerce.
"There is quite an interest in
TANGLES FOR THE TAX MAN
"If you go to a cashless society, it makes it very
difficult tracking . . . reportable income"
— JOHN GIBBONS, President Clinton's lop technology adviser
card "loaded" with their money — less
a hefty 5% commission — which they
could then use to obtain cash or pay
for their cyberwares.
First Bank got numerous inquir-
ies— but it also drew some unwanted
scrutiny. State banking regulators
warned that it couldn't call itself a
bank. The Office of the Comptroller
of the Currency sent an advisory to
buying on the Internet," he insists.
He's got that right. First Bank
isn't the only upstart trying to cash
in on the demand. Consider World
Trade Clearinghouse Ltd., which of-
fers a gold-backed cybercurrency
with cashlike anonymity that offers
"protection from bureaucratic snoops,
nasty ex-spouses, and lawsuit-hungry
lawyers." And officially opening this
month is the Internet Online Off-
shore Casino, run out of the "Rirks
and Caicos Islands, which says it will
accept all manner of E-money and
pay customers 10% annual interest
on the balances they leave in an off-
shore bank the company recently
bought
These enterprises may never
draw in a meaningful number of cus-
tomers. And many raise red flags to
regulators. But the government is
also a long way from getting a good
fix on the activities of the much
larger number of ostensibly legiti-
mate E-money players.
MOfCY UUmBEllElts. The regulatory
gaps are sizable. For example, Stan-
ley E. Morris, director of the Treas-
ury Dept.'s Financial Crimes En-
forcement Network (FinCEN), points
out that there are no laws that limit
the balance of electronic currency
that can be loaded onto an E-cash
card. That could create a major op-
portunity for money launderers. And
no one has determined how to define
whose tax laws apply to transactions
in cyberspace (page 8). Says John H.
Gibbons, assistant to the President
for science and technology: "If you
go to a cashless society, it makes it
very difficult tracking cash income
or reportable income.
Right now, regulators are simply
trying to understand the new tech-
nology and how the market is evolv-
ing. Last April, the Federal TVade
Commission held a conference to ex-.
amine the impact of electronic com-
merce on consumer protection. Fin-
CEN is organizing a colloquium on
electronic currency to be held later
this fall. "We are nowhere near the
issue of regulating it," warns Fin-
cen's Morris. "We're one step back."
Given the speed with which the mar-
ket is advancing, regulators dont
have much time to close that gap.
By Amy Barrett in V/ashington
78 BUSINESS WEEK / JUNE 12, 1995
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Testimony by Dr. David Chaum
Chairman and Chief Executive Officer
DigiCash, Inc.
"The Future of Money'
Before the
Subcommittee on Domestic and International
Monetary Pohcy
of the
Committee on Banking and Financial Services
United States House of Representatives
July 25, 1995
134
Mr. Chairman, Members of the Committee:
As an American who is regarded as the inventor of electronic cash, who has worked over
the last dozen or so years to make the technology viable, and who is now CEO of a
leading company pioneering in its commercialization, I am very pleased by the interest
being shown here and to be here today.
We are being forced to decide between two very different kinds of electronic payment
technology. The core values we as a nation have fought for, and continue to stand for, are
at stake. As a consequence of choosing one of the two directions, these values will be
profoundly eroded; by choosing the other direction, however, they will be preserved and
likely extended. Wise decisions at this critical juncture may also allow us to avoid
certain other pitfalls and to realize economic leadership and growth.
I think my limited time before you is best used to briefly explain the fundamentally
different approaches to security, before coming to privacy, privacy technology, and its
implications.
Security
Security is simply the protection of interests. People want to protect their own money
and banks their own exposure. The role of government is to maintain the integrity of, and
confidence in, the whole system. With electronic cash, just as with paper cash today, it
will be the responsibly of government to protect against systemic risk. This is a serious
role that cannot be left to the micro-economic interests of commercial organizations.
In order for those in government to make informed decisions, it will be necessary for
them to understand the basic ways to secure transactions in different situations.
One basic form is tamper-resistance, exemplified by the chip in a chip card. It is
designed to be hard to modify or to read secrets from. Such tamper-resistance is needed
for "off-line" payments — those in which the reader device receiving payment from a
card, validates payments by contacting a central system only at the end of each day.
(Incidentally, this and the other basic form must rely for security on cryptography,
sometimes refereed to as encryption, which is fundamental to all information security.)
The other basic form is where the individual uses their own computer, whether a desk-
top, lap-top, or palm-top device. Such "software only" is all that is needed in an "on-
line" system — a system in which the party receiving payment communicates over a
network during each payment.
The trend is toward a convergence of these two forms into a hybrid — since people don't
want incompatible forms of money and since it offers the best of both worlds in terms of
convenience; in other words, you will put a chip card into a user-friendly electronic
device of your own choosing, whether on your desk, in your living room, or in you
pocket. I have brought some examples of this to show you...
The problems I see in the industry today reflect a lack architecture. And architecture is
essential when building infrastructure, which is what we are embarking on. In my view, a
sound architecture must: (i) include the two basic forms of security, and allow for their
integration into the hybrid; (ii) prevent the vulnerability of system-wide secrets from
being stored in every card or, nearly as bad, every off-line point of payment; and (iii)
address privacy concerns effectively, since they cannot be addressed as add-ons or
afterthoughts. Today, DigiCash systems are alone in having any of these three attributes,
and their architecture has all three.
Dr David Chaum DigiCash Page 1 of 3
135
Privacy
Let me now tum to this issue of privacy...
A recent Harris pole of the American public began by introducing respondents to all the
consumer benefits of the information superhighway. Then respondents were told that in
order to make such systems economically viable, payment transaction data would have to
be gathered and used for purposes such as making special offers to them. But the
majority of respondents still objected to any use. other than consummation of the
payment, and they gave privacy as the primary reason.
Fully 82% of Americans today expressed concern over privacy of computerized data.
That fraction has been growing steadily ever since the "first wave" of privacy concern
was triggered when Americans saw their names punched into computer cards or printed
on computer generated forms. When people are exposed to the information
superhighway, which provides an awesome glimpse of the power of modem information
technology, with dropping transaction costs leading to finer granularity of payments
(which we will be hearing more about later), concern will reach new levels.
Privacy Technology
"Privacy technology" allows people to protect their own information, and other interests,
while at the same time it maintains very high security for organizations. Essentially, it is
the difference between, on the one hand, a centralized system with disenfranchised
participants (like the electronically tagged animals in feedlots); and. on the other hand, a
system where each participant is able to protect its own interests (like buyers and sellers
on a town market square).
Take ecash as an example of privacy technology. It provides a fully digital bearer
instrument — a number that is itself money, just like a bank note is money. On the
Internet, once someone downloads the requisite software, which takes only a few
minutes, they are ready to send and receive ecash in payments.
Security of ecash is superior to that of paper cash. If it is stolen, it cannot be used: if
someone refuses to give you a receipt, you have proof that they deposited it; and if it is
lost, you can get your money and records back. Counterfeiting ecash poses the same
cryptographic'^challenge as breaking the most sophisticated codes used to protect nuclear
materials, military secrets and large-value wire transfers. Therefore, ecash is certainly
not the target of opportunity.
Ecash is already being experimented with on the Internet in a worldwide monopoly
money trial with tens of thousands of participants. Related card technology has been
extensively tested, by DigiCash licensee Amtech, for highway-speed road tolls and road
pricing, offering privacy instead of dossiers on everywhere people drive. And, CAFE,
the European Commission sponsored trial, at its headquarters buildings in Brussels, of
chip cards that can be inserted into electronic wallets (that I have already shown you),
allows privacy in payments and the electronic ECU. Such "privacy technology" was
even successfully used by the participants at the most recent international meeting of data
protection commissioners.
Ecash has received substantial media coverage; consequently, the public is beginning to
realize that the coming of electronic payments need not mean an obliteration of privacy.
And the superhighway will give consumers unprecedented mobility to choose it.
Dr David Chaum DigiCash Page 2 of 3
136
Some concern about ecash, however, has been raised by various parties over possibilities
it might open for illicit payments. But there is simply no legitimate basis for these
allegations.
Ecash, even when it achieves significant scale, is considerably less dangerous to society
than automatic teller machines. For one thing, like cash, the amount withdrawn and
deposited is on record; but, for another, unlike cash, the amounts of money that pass
through each person's hands all also on record at the bank. Ecash itself is less prone to
abuse than paper bank notes, because privacy is "one-way," which means that an
extortionist, a seller on a black-market, or the acceptor of a bribe is forever vulnerable to
being irrefutably incriminated by the party that paid them.
National Leadership
Governments who stifle the new technology while it is still in its infancy, before its has
had a chance to develop and harmonize with our institutions; who don't pro-actively
support needed infrastructure; or who fail to establish confidence by protecting against
systemic risk — will be left behind in global competition. Countries who take clear
positions based on understanding of the technology, however, and encourage needed
developments, stand to gain enormous economic growth and market leadership. Privacy
technology, whether used for electronic payments, voting, or other public expression, is
the electronic equivalent of a free market and democracy. People will come to insist on it
as an informational human right.
Dr David Chaum DigiCash Page 3 of 3
137
Achieving Electronic Privacy
A cr\j>tographic invention known as a blind signature permits numbers
to serve as electronic cash or to replace conventional identification. The
author hopes it may return control of personal information to the individual
by David Chaum
Every tur.c you make a telephone
call, purchase goods usmg a cred-
it card, subscribe to a magazine
or pay your taxes, that informaoon goes
into a data base somewhere. Further-
more, all these records can be linked
so that they constitute m effect a sm-
gle dossier on your life— not only your
medical and finandal history but also
what you buy. where you travel and
whom you communicate with. It is al-
most impossible to learn the full extent
of the files that various orgaruzations
keep on you. much less to assure their
accuracy or to control who may gain ac-
cess to them.
Organizations link records from dif-
ferent sources for their own protec-
noa Certainly it is in the interest of
a bank looking at a loan application
to know that John Doe has defaulted
on four similar loans in the past two
years. The bank's possession of that
information also helps its other cus-
tomers, to whom the bank passes on
the cost of bad loans. In additioa ches«
records permit Jane Roe, whose pay-
ment history is impeccable, to establish
a charge account at a shop that has
never seen her before.
That same information in the wrong
hands, however, provides neither pro-
tection for businesses nor better service
for consumers. Thieves routinely vise a
stolen credit card number to trade on
their victiiiis' good payment records;
DAVTD CHAUM is head of the Cryptog-
raphy Croup at the Center for Mathe-
matics and Computer Science (CWl) in
Amsterdam. He Is also a founder of Dlgl-
CasK wtuch destlops electronic payment
systemj. Chaum received his Ph.D In
computer sdencc from the Umvrrslty of
California. Berkeley. In 1982 and Joined
CWT In 1984. He helped to found the
International Associanon for Cryptolog-
ic Research and remams active on Us
board: he also consults intemaQonally
on cryptology.
murderers have tracked dovm their tar-
gets by consulting governnient-main-
tamed address records. On another lev-
el, the U.S. Internal Revenue Service has
attempted to single out taxpayers for
audits based on estimates of house-
hold mcome compiled by maillng-llst
companies.
The growing amounts of information
that difTerenl organizations collect
about a person can be linked because
all of them use the same key— in the
U.S. the social security number— to iden-
tify the individual in question This iden-
tifier-based approach perforce trades
off seoirity against individual Uberties.
The more information that organiza-
tions have (whether the intent is to pro-
tect them from fraud or simply to tar-
get marketing efforts), the less privacy
and control people retain.
Over the past eight years, my col-
leagues and I at CWI (the Dutch na-
tionally funded Center for Mathemat-
ics and Computer SdeiKe in Amster-
dam) have developed a new approach,
based on fimdamental theoretical and
practical advances in cryptography,
that makes this trade-off uiuiecessary.
Transactions employing these tech-
niques avoid the possibility of fraud
while maintaining the privacy of those
who use them.
In our system, people would in ef-
fect give a different (but definitively
verifiable) pseudonym to evvy organi-
zation they do business with and so
make dossiers impossible. They could
pay for goods in untraceable electronic
cash or present digital credentials that
serve the function of a banking pass-
book, driver's license or voter registra-
tion card without revealing their iden-
tity. At the same time, organizations
would benefit from increased security
and lower record-keeping costs.
Recent innovations in microelectron-
ics make this vision practical by pro-
viding personal "representatives' that
store and manage their owners' pseud-
onyms, credentials and cash. Micropro-
cessors capable of carrying out the nec-
essary algorithms have already been
embedded in pocket computers the size
and thickness of a credit card Such sys-
tems have been tested on a small scale
and could be in widespread use by the
middle of this decade.
The starting point for this ap-
proach is the digital signanire.
first proposed in 1976 by Whit-
field Diffie, then at Stanford University.
A digital signature transforms the mes-
sage that IS signed so that anyone who
reads it can be sure of who sent
it [see 'The Mathematics of Public-Key
Cryptography," by Martin E Hellman;
SdENTinC AMERICAN, AugUSt 19791.
These signatures employ a secret key
used to sign messages and a public one
used to verify theiiL Only a message
signed with the private key can be ver-
ified by means of the public one Thus,
if Alice wants to send a signed message
to Bob (these two are the cnpiographic
community's favorite hypothciical char-
acters), she transforms it usinu her pri-
vate key, and he applies her public key
to make sure that it w^s she »ho sent
it The best methods knoi^n fur produc-
ing forged signatures would require
many years, even using computers bil-
lions of times faster than iho^e now
available.
To see how digital signatures can
provide all manner of unforKiable cre-
dentials and other services, mnsider
how they might be used to prmide an
electronic replacement for i.ish. The
First Digital Bank would ottvr < k-ctron-
ic bank notes: messages sium-d using
a particular private key. All nussages
bearing one key might be »Mprth a dol-
lar, all those bearing a diffcrmi key five
dollars, and so on for whaii".' r denom-
inations were needed. Thcsf ■ !• < tromc
bank notes could be authcntu ji.-d using
the corresponding public ki\ "imhthe
bank has made a matter of r.-- • .rd. First
Digital would also make puMx a key
to authenticate electronu ixuments
SciENTmc AMERICAN August 1 992
138
sent from the bank to its customers.
To withdraw a doUar from the bank,
Alice generates a note number (each
note bears a different number, akin to
the serial number on a btU); she choos-
es a 100-digit number at random so
that the chance anyone else would gen-
erate the same one is negligible. She
signs the number with the pnvate key
corresponding to her "digital pseud-
onym" (the public key that she has pre-
viously established for use with her ac-
count). The bank verifies Alice's signa-
oire and removes it from the note
number, signs the note number with its
wonh-one-doUar signature and debits
her account. It then returns the signed
note along with a digitally signed with-
drawal receipt for Alice's records. In
practice, the aeation, signing and trans-
fer of note numbers would be carried
out by Alice's card computer. The pow-
er of the cryptographic protocols, how-
ever, lies in the fact that they are se
cure regardless of physical medium;
the same transactions could be carried
out using only pencil and paper.
when Alice wants to pa> for a pur-
chase at Bob's shop, she connects her
"smart" card with his card reader and
transfers one of the signed note num-
bers the bank has given her After ven-
fying the bank's digital signature. Bob
transtnits the note to the bank, much as
a merchant verifies a credit card trans-
action today. The bank reverifies its
signature, checks the note against a list
of those already spent and credits Bob's
account. It then transmits a "deposit
slip," once agam unforgeably signed
with the appropnate key. Bob hands
the merchandise to Alice along with his
own digitally signed receipt, complet-
ing the transactioa
This system provides secunry for all
three parties. The signatures at each
stage prevent any one from cheating
either of the others: the shop cannot
deny that it received payment, the bank
cannot deny that it issued the notes or
that it accepted them from the shop
for deposit, and the customer can nei-
ther deny withdrawing the notes from
her account nor spend them twice.
This system is secure, but it has no
privacy. If the bank keeps track of note
numbers, it can link each shop's de-
posit to the corresponding withdrawal
and so determine precisely where and
when Alice (or any other account hold-
er) spends her money. The resultmg
dossier is far more mrrusive than those
now being compiled. Funhermore. rec-
ords based on digital signatures are
more vulnerable to abuse than conven-
tional files. Not only are they self-au-
thenticating (even if they are copied,
the information they contain can be
verified by anyone), but they also per-
mit a person who has a particular kind
of information to prove its e.xistence
without either giving the information
away or revealing its source. For exam-
ple, someone might be able to prove in-
controvertibly that Bob had telephoned
Alice on 12 separate occasions without
having to reveal the time and place of
any of the calls.
I have developed an extension of digi-
tal signatures, called blind signatures,
that can restore privacy. Before send-
OIGITAL CASH Sows tracelcssly from bank through coo-
suraer and merchant before returning to the bank. Using a
small computer *representative,* a person creates a random
number to serve as a bank note. Thie bank debits the appro-
priate account and signs the note with an unforgeabic digital
signature i~<irjri.ig Its value. Tbe bank credits the merchant's
account wfaeo tbe note Is presented for payment A technique
known as a blind stgnature prevents tbe bank from seeing tbe
note number so the bank wfll be unable to correlate wltbdtaw-
als from one account with deposits to another.
SOENTinc AMERICAN August 1992 97
139
How to Create Secure Digital Pseudonyms
yi ^^ nn<;pnuPR
*
Each personal repre-
sentative contains an
embedded observer
REPRESENTATIVE m addition to its own
microprocessor.
The representative and the
observer generate numbers
that the observer uses to
produce a set of blinded
digital pseudonyms.
The observer signs
the pseudonyms
with a special
built-in key
The representative checks
the pseudonyms to make
sure they do not disclose
any illicit information and
passes them to a validating
authority.
ing a note number to the bank for sign-
ing, Alice in essence mulupbes it by a
random factor. Cor\sequentlv. the bank
knows nothmg about what it Is signing
except that it cames Alices digital sig-
nature. After receiving the blinded note
signed by the bank. Alice divides out
the blinding factor and uses the note
as before.
The blinded note numbers are "un-
condiaonally untraceable'— that is, even
if the shop and the bank collude, they
cannot determine who spent which
notes. Because the bank has no Idea of
the blinding factor, it has no way of
Unking the note numbers that Bob de-
posits with Alice's withdrawals. Where-
as the security of digital signatures is
dependent on the difficulry of partic-
ular computaoons, the anonymity of
blinded notes is limited only by the un-
predictability of Alice's random num-
bers. If she wishes, however, Alice can
reveal these numbers and permit the
notes to be stopped or traced.
Blinded electronic bank rxites protea
an individual's privacy, but because
each note Is simply a number, it can be
copied easily. To prevent double spend-
ing, each note must be checked on-Une
against a central Ust when it is spent
Such a verification procedure might be
acceptable when large amounts of mon-
ey are at stake, but it Is far too expen-
sive to use when someone is jiisl buying
a newspaper. To solve this problem, my
colleagues Amos Fiat aixi Monl Naor and
I have proposed a method for generat-
ing blinded notes that requires the pay-
er to answer a random numeric query
about each note when making a pay-
ment. Spending such a note oikc does
not compromise unconditional imtrace-
abillty, but spending it rwice reveals
enough information to make the pay-
er's account easily traceable. In faa. It
can yield a digitally signed confession
that cannot be forged even by the bank.
Cards capable of such anonytnous
payments already exist. Indeed, Dlgi-
Cash, a company with which I am as-
sociated, has installed eqtupment in
two office buildings In Amsterdam that
permits copiers, fax machines, cafete-
ria cash registers and even coffee vend-
ing machines to accept digital "bank
notes." We have also demonstrated a
system for automatic toll collection in
which automobiles carry a card that re-
sponds to radioed requests for pay-
ment even as they are traveling at high-
way speeds.
My colleagues and I call a com-
puter that handles such cryp-
tographic transactions a '^p-
resentatlve." A person might use dif-
ferent computers as representatives
depending on which was convenient
Bob might purchase software (trans-
mitted to him over a network) by using
his home computer to produce the req-
uisite digital signatures, go shopping
with a "palm-top" personal computer
and carry a smart credit card to the
beach to pay for a drink or crab cakes.
Any of these niachines could represent
Bob In a transaction as long as the digi-
tal signatures each generates are under
his control
Indeed, such computers can act as
representatives for their owners m vir-
tually any kind of transaction. Bob
can trust his representative and Alice
hers because they have each chosen
their own machine and can reprogiam it
at will (or, m pnnaple, build it from
scratch). Organizanons are proteaed by
the cryptographic protocol and so do
not have to trust the representatives.
The prototypical representative is a
smart crediKardslze computer con-
taining memory and a miaoprocessor.
It also Incorporates its own keypad and
display so that Its owner can control the
data that are stored and exchanged. If
a shop provided the keypad and dis-
play, It could Intercept passwords on
their way to the card or show one price
to the customer and another to the
card. Ideally, the card would communi-
cate with terminab in banks and shops
by a short-range communications link
such as an infrared transceiver and so
need never leave its owner's hands.
When asked to make a payment, the
representative would present a sum-
mary of the particulars and await ap-
proval before releasing funds. It would
also Insist on electromc receipts from
organizadons at each stage of all trans-
actions to substannate its ov%ner's po-
sition in case of dispute. By requiring
a password akin to the PIN (personal
identifying number) now used for bank
cards, the representanve could safe-
guard Itself from abuse by thieves. In-
deed, most people would probably keep
backup copies of their keys, electronic
bank notes and other data: they could
recover their funds if a representative
were lost or stolea
Personal representanves offer excel-
lent protection for Individual privacy,
but organizations might prefer a mecha-
nism to protect their mterests as strong-
ly as possible. For example, a bank
might want to prevent double spending
of bank notes altogether raiher than
98
SciENTinc AMEWCAN August 1992
140
The validating authority
checks the observer's
special key. removes it
and attaches its own
unforgeable signature.
The representative re-
moves the blinding from
the validated pseudonyms
and stores them for future
use by the observer.
simply detectmg it after the faa. Some
organizations might also want to en-
sure that certain digital signatures are
not copied and widely disseminated
(even though the copying could be de-
tected afterward).
Organizations have already begun
issuing tamperproof cards (in effect,
their own representatives) programmed
to prevent undesirable biehavior. But
these cards can act as "Little Brothers"
in everyone's pocket
We have developed a system that
sartsfies both sides. An observer— a
tamper-resistant computer chip, issued
by some entire that organizations can
trust— aas like a notary and certifies
the behavior of a representative in
which it is embedded Philips Indus-
tries has recently introduced a tamper-
resistant chip that has enough comput-
ing power to generate and verify digital
signatures. Since then. Siemens, Thom-
son CSF and Motorola have aniHxmced
plans for similar circuits, any of which
could easily serve as an observer.
The central Idea behind the protocol
for observers is that the observer does
not trust the representative in which
it resides, nor does the representative
trust the observer. Indeed, the repre-
sentative must be able to control all
data passing to or from the observer
otherwise the tamperproof chip might
be able to leak information to the world
at targe.
When Alice first acquires an observ-
er, she places it in her smart-card rep-
resentative and takes it to a validat-
ing authority. The observer generates a
batch of public and private key pairs
from a combination of its own random
numbers and numbers supplied by the
card. The observer does not reveal its
numbers but reveals enough informa-
tion about them so that the card can
later check whether its numbers were
in fact used to produce the resulting
keys. The card also produces random
data that the observer will use to blind
each key.
Then the observer blinds the public
keys, signs them with a special built-in
key and gives them to the card. The
card verifies the blinding and the signa-
ture and checks the keys to make stire
they were correctly generated. It pass-
es the blinded, signed keys to the vali-
dating authority, which recognizes the
observer's built-in signature, removes
it and signs the blinded keys with Its
own key. The authority passes the keys
back to the card, which unbllnds them.
These keys, bearing the signature of
the validating authority, serve as digital
pseudonyms for future transactions;
Alice can draw on them as needed
A a observer could easily prevent
/\ (rather than merely detect) dou-
JL \. ble spending of electronic bank
notn. When Alice withdraws money
from her bank, the observer witnesses
the process and so knows what notes
she received At Bob's shop, when Alice
hands over a note from the bank, she
also hands over a digital pseudonym
(which she need use only oiKe) signed
by the validating authority. Then the ob-
server, using the secret key correspond-
ing to the validated pseudonym, signs
a statement certifying that the note will
be spent only once, at Bob's shop and
at this particular time and date. Alice's
card verifies the signed statement to
make sure that the observer does not
leak any mformation and passe'; ii to
Bob. The observer is programmed to
sign only one such statement for an>
given note.
Many transactions do not simpl> re-
quire a transfer of money Instead the>
involve credennals— mformanon about
an individual's relationship to some or-
ganization. In today's identifier-based
world, all of a person's credentials are
easily linked. If Alice is deciding wheth-
er to sell Bob insurance, for example,
she can use his name and date of birth
to gam access to his credit status, medi-
cal records, motor vehicle file and crim-
inal record, if any.
Using a representative, however. Bob
would establish relationships with dif-
ferent organizations under different dig-
ital pseudonyms. Each of them can rec-
ognize him unambiguously, but none of
their records can be linked
In order to be of use, a digital cre-
dential must serve the same function
as a paper-based credential such as a
driver's Ucense or a credit report. It
must convince someone that the per-
son attached to it stands in a particular
relation to some issumg authonty. The
name, photograph, address, physical de-
scription and code number on a dnv-
er's license, for example, serve merely
to link it to a particular person and to
the corresponding record m a data base.
Just as a bank can issue unforgeable,
untraceable electronic cash, so too could
a university issue signed digital diplo-
mas or a credit-reporting bureau issue
signatures indicating a person's ability
to repay a loarL
When the young Bob graduates with
honors in medieval literature, for ex-
ample, the university registrar gives his
representative a digitally signed mes-
sage asserting his academic credentials.
When Bob applies to graduate school,
however, he does not show the admis-
sions comminee that message. Instead
his representative asks its observer to
sign a statement that he has a B.A. cum
laude and that he qualifies for finan-
cial aid based on at least one of the
university's criteria (but without reveal-
ing which ones). The observer, which
has verified and stored each of Bob's
credentials as they come m, simply
checks its memory and signs the state-
ment if it is true.
In addition to answering just the
right question and bemg more reli-
able than paper ones, digital credentials
would be both easier for individuals
to obtain and to show and cheaper for
organizations to issue and to authen-
ticate. People would no longer need to
fill out long and revealing forms. In-
SciENTinc .AMERICAN Augusi 1992 99
141
stead their representatives would con-
vince organizations that they meet par-
ticuJar requirements without disclosing
any more than the simple fact of qual-
ification. Because such credentials re-
veal no unnecessary information, peo-
ple would be willing to use them even
in contexts where they would not will-
ingly show identificadon, thus enhanc-
ing secunry and giving the organiza-
tion more useful data than it would
otherwise acquire.
Positive credentials, however, are not
the only kind that people acquire. They
may also acquire negative credentials,
which they vrould prefer to conceal:
felony convictions, license suspensions
or statements of pending bankruptcy.
In many cases, individuals will give or-
gaxuzanons the nght to inflia negative
credentials on them in return for some
service. For Instance, when Alice bor-
rows books from a library, her observ-
er would be mstruaed to register an
overdue notice unless it had received a
receipt for the books' return within
some fixed time.
Once the observer has registered a
negative credential, an organization can
find out about it simply by asking the
observer (through ihe representative) to
sign a message attesting to its presence
or absence. Although a representative
could muzzle the observer, it could not
forge an assertion about the state of its
credentials. In other cases, organlzatkxis
might simply take the lack of a posi-
tive credential as a negatue one. If Bob
signs up for skydiving lessons, his in-
structors may assume that he is medi-
cally unfit unless they see a credential
to the contrary.
For most credentials, the digital sig-
nature of an observer is suffiaent to
convince anyone of its authenoory. Un-
der some circumstances, however, an
organization might insist that an ob-
server demonstrate its physical pres-
ence. Otherwise, for example, any num-
ber of people might be able to gain
access to nontransferable credentials
(perhaps a health club membership) by
using representatives connected by
concealed communications links to an-
other representative contaming the de-
sired credential.
Moreover, the observer must carry
out this persuasion while its input and
output are under the control of the
representative that contains it. When
Alice arrives at her gym, "ihe card read-
er at the door sends her observer a se-
ries of single-bit challenges. The ob-
server immediately responds to each
challenge with a random bit that is en-
coded by the card on its way back to
the organization. The speed of the ob-
server's response establishes that it is
inside the card (since processing a sin-
gle bit Introduces almost no delay com-
pared with the time that signals take to
traverse a wire). After a few dozen iter-
ations the card reveals to the observer
how it encoded the responses; the ob-
server signs a statement mcluding the
challenges and encoded responses only
if It has been a party to that challenge-
response sequence. This process con-
vinces the organizauon of the observ-
er's presence without allowing the ob-
server to leak information.
Organizations can also issue cre-
dentials using methods that depend
on cryptography alone rather than on
observers. Although currently practical
approaches can handle only relatively
simple queries, Gilles Brassard of the
Umversity of Montreal Claude Crepieau
of the Ecole Normale Supeneure and I
have shown how to answer arbitrary
combinations of questions about even
the most complex credentials while
mamtaining unconditional unlinkabil-
iry. The concealment of purely crypto-
graphic negative credentials could be
detected by the same kinds of tech-
niques that detect double spending of
electronic bank notes. And a combina-
tion of these cryptographic methods
with observers woiild offer accountabil-
ity after the faa even if the observer
chip were somehow compromised.
The improved security and priva-
cy of digital pseudonyms exaa a
price: responsibility. At present,
for example, people can disavow cred-
it card purchases made over the tele-
REPRESENTATTVE
037361409
DO YOU HAVE ANY OF THE FOLLOWING:
A) 8A ANO 3 YEARS- EXPERIENCE? |.
8) 10 YEARS' EXPERIENCE?
C) Pti.O. AND RECOdiMENOATlONS?
~^':3
DIGITAL CREDENTIALS put personal infomution under the
control of an individual's represenutive and its observ-
er. When Alice (one of the author's two hypoOMtical charac-
ters) flnishes her undergradiute worV, the university gives
her a digitally signed degree. Later, her observer can use its
knowledge of the degree to answer questions about her qual-
iflcatioiis witbout revealing any more Infonnalion about ber
than absolutely Dcccssary.
I(X)
SciENTinc AMERICAN August 1992
92-489 - 95 - 6
142
phone or cash withdrawals from an au-
tomaric teller machine (ATM ) The bur
den of proof is on the bank to show that
no one else could have made the pur-
chase or withdrawal. If computenzed
representatives become widespread,
owners will establish all their own pass-
words and so control access to their
representatives. They will be unable to
disavow a representative's actions.
Current tamper-resistant systems
such as ATMs and their associated
cards typically rely on weak, inflexible
security procedures because the> must
be used by people who are neither
highly competent nor overly concerned
about security. If people supply their
own representatives, they can program
them for varying levels of security as
they see fit. (Those who wish to trust
their assets to a smgle four -digit code
are free to do so. of course.) Bob might
use a short PIN (or none at all) to au-
thorize minor transactions and a long-
er password for major ones. To protect
himself from a robber who might force
him to give up his passwords at gun-
point, he could use a "duress code"
that would cause the card to appear to
operate normally while hiding its more
Important assets or credentials or per-
haps alerting the authorities that it had
been stolen.
A personal representative could also
recognize its owner by methods that
most people woiild consider unreason-
ably mtrusive in an identifier-based
system; a notebook computer, for ex-
ample, might verify its owner's voice or
even fingerprints. A supermarket check-
out sojin?r capable of recognizing a
persr.n's thumbprint and debiting the
cost of groceries from their savings
account is Orwellian at best. In con-
trast, a smart credit card that knows its
owner's touch and doles out electron-
ic bank notes Is both anonymous and
safer than cash. In addition, incorporat-
ing some essential part of such iden-
tification technology into the tamper-
proof observer would make such a
card suitable even for very high securi-
ty applications.
Computerized transactions of all
kinds are becoming ever more
pervasive. More than half a doz-
en countries have developed or are test-
ing chip cards that would replace cash
In Denmark, a consortium of banking,
utility and transport comf>anies has
anrtounced a card that would replace
coins arid small bills; in France, the tele-
communications authorities have pro-
posed general use of the smart cards
now used at pay telephones. The gov-
enunent of Singapore has requested
■■i ^V
COMPUTERIZED CREDIT CARD developed by Toshiba and Visa International con-
tains a miCToprocessor, memory, keypad and dlspby. Although this card identifies
its user during transactions, the same hardware could be reprogrammed as a per-
sonal representative for spending digital cash.
bids for a system that would commu-
nicate with cars and charge their sman
cards as they pass various points on
a road (as opposed to the simple ve-
hicle identification systenis already In
use in the U.S. and elsewhere). And ca-
ble and sateUite broadcasters are ex-
perimenting with smart cards for deliv-
ering pay-per-view televisloa All these
systems, however, are based on cards
that identify themselves during every
traiisactioiL
If the trend toward identifier-based
smart cards continues, personal priva-
cy wUl be increasingly ertxled. But in
this conflict between organizational se-
curity and individual liberty, neither
side emerges as a clear winner. Each
round of improved identificaUon tech-
niques, sophisticated data analysis or
extended linking can be frvistrated by
widespread noncompliance or even leg-
islated limits, which in turn may engen-
der attempts at further control
Meanwhile, in a system based on rep-
resentatives and observers, organiza-
tions stand to gain competitive and po-
litical advantages from increased pub-
lic confidence (in addition to the lower
costs of pseudonymous record-keep-
ing). And individuals, by maintaining
their own cryptographically guaranteed
records and making only necessary dis-
closures, will be able to protect their
pnvacy without infringing on the legiti-
mate needs of those with whom they
do business.
The choice between keeping informa-
tion In the hands of individuals or of or-
ganizations is being made each time any
government or business decides to au-
tomate another set of iransacuons. In
one direction lies unprecedented scruti-
ny and control of people's li^es. in the
other, secure parity between individu-
als and organizations. The shape of so-
dery in the next century may depend
on which approach predominates.
RIRTWER RLADIM
SECTJuriY wrrHoiTT idi vi
iriCATION:
TRANSACTION SYSTEMS M
M^KE Big
BROTHER OBSOLETE. Daud
t haum in
Commumcarlons of the Ac
( Vol. 28.
No. 10. pages 1030-104-1. 11.
.*i-r 1983.
THE Dotmc Crvftocrapiii «
t^lOBLEM:
UNCONDmONAl. SENDER A.M
KICIPIENT
Ul^TRACEABILrtY. DaMd Lhjv
m in Jour-
nal of Cryjxology, Vol 1 s
' 1 . pages
6S-75: 1988.
MODERN CRYPTOLOGI *
1 rORlAL.
CUles Brassard In Lectun s.
.\ in Com-
puferSrten<:e,VoL325 Sprni;.r \erlag. |
1988.
PRIVACY Protected Pa^ mi •.
^ INCON-
DmoNAL Payer AND '■»
■mieUn-
TRACEABorrY David Ch.i..i
1 in Smart
Card 2000 The Future ol k
j'Oi Edit-
ed by David Chaum and ir
n.l Schau-
miiller-BichL North-Hollan.t
1 .h'l
SCIENTinC AMERICAN Augusl I '-'J 101
143
Testimony of William N. Melton,
CEO, CyberCash Inc.
delivered to the
House Committee on Banking and Financial Services
Subcommittee on Domestic and International Monetary Policy
Hon. Michael N. Castle, Chairman
Hearing on the Future of Money and Payment Systems
July 25, 1995, 10:00 a.m.
My name is Bill Melton. I am President/CEO of CyberCash.
The explosive growth of the Internet carries with it the potential for wholly new electronic payment
systems. For the first time, the average American citizen is able to communicate instantaneously,
at a negligible cost, with somewhere between 30 and 50 million other people, all over the world.
In this new electronic world, geography and national boundaries become irrelevant. People will
travel and shop around the planet without regard to distance, time of day or location. And because
people will be buying and selling things in this new electronic world, payment systems will evolve
to support them. The potential even exists for an entirely new monetary system in cyberspace, one
that transcends national governments and national boundaries.
But monetary systems are ultimately founded on trust-trust that your money will be there when
you want it, and its value will remain relatively stable. That trust exists now in the three-
dimensional world because of a strong global banking system backed by stable national
governments. And we at CyberCash believe that commerce on the Internet will be best served by
facilitating the transition of existing payment systems— and the trust that is carried with them— into
cyberspace. While new payment systems and new monetary systems may ultimately evolve in
the future, CyberCash believes that the best way to get there is build on the trust that already exists
in the present monetary system.
Accordingly, CyberCash builds technology tools for banks and credit card associations. Our
technology tools facilitate the use of a variety of payment instruments on the Internet. Our focus is
primarily consumer payment instruments, including credit cards and checks.
Of course our technology does not actually push a plastic credit card nor someone's checkbook
over the wires of the Internet. Rather CyberCash provides software based technology tools which
pass secure information over the Internet, the secure information then becomes the functional
equivalent of the physical plastic card or of a paper check. The software based technology tools
permit the smooth integration of the new "information based" plastic cards or "electronic" checks
with the older manual systems.
Credit Cards
For example, as the credit card associations announce standards governing the use of their cards on
the Internet, CyberCash creates software which implements these standards. The software
includes components which run concurrently on the consumer's personal computer, on the
merchants' computers, and at a gateway into the banking systems. CyberCash provides this
144
software free of charge to the banks and to the credit card associations, who then in turn provide
this software to merchants and consumers. The software components then work in unison,
transporting credit card information securely to the acquiring bank of the authorized merchant. The
acquiring bank, as part of their normal discount rate charged to the merchant, assumes the cost of
transporting that transaction through the financial networks, including a fee of a few cents to
CyberCash. This is the functional equivalent of the "800" number transport fee which acquiring
banks pay today.
Though the physical plastic may be missing in this transaction, there is much more security and
privacy in this Internet transaction than exists in the physical world today. In the new Internet
transaction, all parties-the consumer, the merchant and the bank-are authenticated using a
technology called digital signatures. These digital signatures are many times more secure than any
handwritten signature we may use today. The consumer will no longer need to be concerned about
losing his credit card. Without the consumer's "digital signature" the credit card number is
worthless on the Internet. The consumer can have absolute confidence the merchant is an
"authorized merchant" because the software on the consumer's computer has the proof of the
bank's digital signature. And of course the bank receives the undeniable digital signature of both
the consumer and the merchant.
For privacy all transactions are completely encrypted and absolutely protected from monitoring or
tampering of any kind. Thus on the Internet we will achieve simultaneously a dramatically
improved level of both security and privacy.
Standing behind these systems is the entire strength of the banks and the credit card associations-
effectively the strength of the American banking system. Since the introduction of credit cards, the
industry has evolved systems to monitor and control risk, while at the same time providing ever
more and varied payment products to the consumer. Competitive pressures have continued to
drive costs down and to squeeze risks out of the system.
As we move into the world of credit card use on the Internet, we urge that the competitive
pressures which have driven the evolution of the industry to date be trusted and be permitted to
continue driving evolution on the Internet.
Electronic Checks
Our checks and checking accounts are even more a part of our lives than are credit cards. To have
a checking account you do not have to "qualify" under the rigid credit requirements of the credit
card industry. To receive a check from someone else, you do not have to be a "qualified
merchant." I often ask my friends in the credit card industry when was the last time they used
their Visa or MasterCard to send $10 to their mother. Not recently! So checks are an important
part of our economic lives.
As the Internet is, in many ways, making geography evaporate (the whole world exists more or
less instantly on the PC screen on your desk), so that same Internet technology will give a whole
new utility and dynamism to that old check book in your pocket.
While checks are wonderful, we as a society are fairly well educated that checks also have some
problems. ..generally referred to as an occasional "bounce" or an occasional forged signature.
145
Well, we have some good news for you. The same software technology tools that are being built
to make credit cards safe on the Internet also make checks safe on the Internet. With the speed and
instantaneous nature of the Internet, we no longer have to wonder if a check is good.. .we will
know instantly. ..at the time we accept it. Through the software technology tools that CyberCash is
building for the banks, funds will be certified prior to the check being sent. Checks received by
you, received within seconds of their being sent, will be literally as good as money in the
bank... because that is exactly where the money will be.. .in the bank.
Also, the same technology of digital signatures and encryption that we use to secure credit cards on
the Internet will be used to secure checks. No longer will there be forged signatures. Digital
signatures effectively eliminate forgery. No longer will there be false claims of forgery; digital
signatures are essentially non-deniable. No longer will there be theft of checks in the mail. Checks
will travel over the Internet in totally secure encrypted envelopes.
The automated check clearing system in the United States, in spite of the problems of paper
transport, has developed into a surprisingly low cost and efficient system. Most of the traditional
banking system is built around the accounting for and managing the flow of paper checks around
the country. Regulatory agencies have built systems to in turn ensure the safety of the banking
system behind the massive flow of checks.
By enabling checks on the Internet, we are building upon this same foundation. We are leveraging
the experience of a hundred years, while simultaneously removing some known problems.
Perhaps most importantly, checks represent a personal relationship between the check book holder
and his or her bank. In the new worid of the Internet, that special relationship of credit, trust and
responsibility will be given a new lease on life. And that new lease on life will be due to the
technology of the Internet, namely instantaneous transfer of information, digital signatures, and
encryption.
In conclusion, we would urge the committee to join us in our optimism in seeing the enhancement
of some old payment instruments by the new technology tools. We would further urge the
committee to embrace our faith in the ability of competitive market place pressures to continue to
bring consumers safer, more convenient and lower cost payment options.
Respectfully submitted,
William N. Melton, CEO
CyberCash, Inc.
146
STATEMENT OF
ROSALIND L. FISHER
EXECUTIVE VICE PRESIDENT
VISA U.S.A-
before the
SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL
MONETARY POLICY
of the
COMMITTEE ON BANKING AND FINANCIAL SERVICES
UNITED STATES HOUSE OF REPRESENTATIVES
July 25, 1995
147
THE FUTURE OF THE PAYMENT SYSTEM
Tesrimony before the Domestic and International Monetary Policy Subcommittee
of the House Banking Committee
July 25, 1995
Mister Chairman, Members of the Subcommittee, my name is Rosalind L. Fisher,
and 1 am Executive Vice President of Delivery Systems for Visa U.S.A. I am
responsible for the Visa data communications and processing systems
infrastructure -- which we call VisaNet. This network is the cornerstone of our
current payment system and the foundation on which we are building the new '
products and services that will be the payment systems of tomorrow. It is an
honor for me to speak to you today about that future on behalf of Visa and its
more than 19,000 member financial institutions.
Visa is an association that is owned by those institutions. Visa banks issue more
than 402 million payment cards, which are accepted at 13 million merchant
locations around the world; Visa itself processes more than $630 billion in
transactions annually.
While there has been much recent press attention to "electronic money" and the
role of a host of new entrants into the business, I am proud to say that Visa and,
most importantly, its member financial institutions are playing -- and must
continue to play -- a central role in the introduction and use of these electronic
consumer payment services. I say "central role" for two different but equally
compelling reasons.
148
First, Visa and its member banks have a solid track record of developing an
array of payment systems that meet consumer needs, and we are confident of
our ability to continue to do so. Second, the integrity of the payment system,
and public confidence in it, could be at risk if so called "electronic money"
becomes nothing more than zeros and ones — digital signals — wdthout the
backing and central involvement of regulated financial institutions.
As to the first point, the success of Visa's products is well known. From our Visa
Classic and Visa Gold credit products to business solutions such as the
Purchasing Card, the Business Card and the Corporate Card, Visa and its
members offer many credit options to consumers and businesses alike. Visa also
offers the Visa Check Card, an off-line debit card, and Interlink, an on-line debit
card (debit cards access a deposit or share draft account); Visa TravelMoney, a
prepaid card for obtaining local currency worldwide at favorable exchange
rates; and Visa Travelers Cheques. Visa also runs the largest global ATM
network under the "Plus" brand, as well as an automated clearing house service
and an electronic check imaging service.
The second reason Visa and its member financial institutions must be involved
in these evolving services has a public policy foundation: the integrity of the
payment system and public confidence in it demands that regulated financial
institutions be central players. While we must ensure such involvement, we
caution that premature government regulation - or the failure to modify existing
regulations to accommodate evolving technologies ~ could chill or halt the
delivery of new financial products to consumers.
149
I will comment further on this important issue in a moment, but first let me give
you a closer look at some of the products and services of the future.
Evolving payment systems is the very core of the Visa mission on behalf of its
members. In fact, the Visa organization is itself an example of that evolutionary
process. And since the first authorization of the blue, white and gold card over
the telephone more than 25 years ago. Visa and its members have been helping
to shape that evolution in ways that provide benefits to consumers and
merchants around the world.
By providing payment systems that offer consumers and merchants convenience,
security and utility. Visa and its members have played a vital role in leading
beneficial change in the way business is conducted around the world.
New and innovative technology is the underpinning for the evolution of
payment systems. The ability of Visa and its member financial institutions to
lead these changes has been enabled by our efforts to harness new technologies
and leverage their benefits. While the Visa approach relies on technology, it is
consumer and market driven. High tech dazzle only adds value when it
provides solutions and products that consumers want and need. Visa and its
members build products and services that work for their cardholders and
merchants based on innovative technology.
Building solutions that work for consumers and merchants means focusing on
much more than just technology -- it means adding value and convenience to
their lives and their businesses. It also means adding value while addressing
issues of key importance. Questions of security, risk and privacy are all crucial
150
factors in the development of payment products and services. Does this product
offer security to consumers and merchants aHke? Will it protect financial
institutions and their customers from risk? Does it offer protection of data and
privacy for its users? All of these questions must be answered and addressed
before you have a business solution. And all of these factors are the crux of the
goals of Visa and it members as w^e move toward the technology-driven
payment systems of the future.
Chip technology and stored value cards
One of the key technologies that will move our payment system into the future
will be that of the integrated circuit chip. Cards embedded with microprocessor
chips are often referred to as "smart cards." The microprocessor can be used to
store both financial and non-financial information.
Visa's first application of this chip technology is a stored value card that we call
Visa Cash. This card is prepaid with a set amount of value loaded onto the
microchip and is an alternative to cash for consumers making small purchases,
usually those under $20. Our research shows a huge demand from consumers
for this product - and huge consumer benefits.
Imagine the convenience of parking at the Dunn Loring metro station without
having to dig in the glove compartment for change for the meter ~ getting your
Metro ticket quickly and easily without having to worry about the dollar bill
being crinkled and spit back at you and stopping to buy a copy of the Post and a
bagel downstairs on your way to the office ~ all with this one card.
151
Stored value cards will significantly benefit consumers, merchants and others
involved in payment transactions. Consumers will benefit from ease of use,
convenience and increased transaction speed compared to cash and checks.
The stored value card also will be beneficial to those consumers who don't
already have many payment options. A bank account isn't necessary to use a
stored value card. This product could provide payment card utility for those
consumers who don't have or prefer not to have, a relationship with a financial
institution and thus don't have cash readily available through ATMs or the
ability to easily cash checks.
Merchants will benefit from reduced costs as a result of less pilferage, theft and
vandalism (particularly in unattended and mass transit environments), and
reduced cash handling due to electronic payments. They will also benefit from
increased transaction speed.
One of the locations that merchants are most excited about is automated
locations, such as vending machines. This technology will increase the security
of accepting payment at these locations and decrease the costs of dealing with
coins and currency.
Visa Cash will be introduced in the Southeast in the Fall of 1995 and showcased
during the 1996 Summer Olympics and will be available in disposable and
reloadable forms. Reloadable cards allow consumers to put additional value on
the card at convenient locations such as ATMs. The card can be a stand-alone --
that is, with only a stored value function — or the stored-value function can be
placed on another card, such as an ATM card.
152
While stored value is the first appIicatior\ of chip technology available to
consumers, others are in development now. The next function likely will be one
which allows consumers to utilize the product for the maintenance of loyalty or
frequent-buyer programs. Consumers will be able to access frequent-flyer
programs, electronic coupons and other buyer-rewards programs quickly and
easily through this appUcation of technology.
Remote banking
Not all of the products and services being introduced by Visa and its member '
institutions are card-based. Electronic or remote banking is one of the most
important initiatives in which exploding technology is enabUng Visa and its
members to build new product offerings that bring great value and benefit to
consumers. Remote banking will be a cornerstone of the next generation of the
payment system ~ and Visa and its members are at the forefront of this
burgeoning arena.
To truly benefit consumers, remote banking must first be accessible and easy-to-
use. Choices such as the type of access device and user software must be left to
the individual to provide usable value. For that reason. Visa's remote banking
subsidiary. Visa Interactive, offers or is developing interfaces to almost every
access device imaginable. From simple touch tone phones and screen phones to
personal computers, personal digital assistants (PDAs) and interactive television.
Visa is offering a myriad of options for member financial institutions to present
to their customers.
153
Besides access. Visa is also leveraging the VisaNet system and the latest
advances in client server and networking technology to offer an electronic
remittance system that for the first time will make bill payment a truly electronic
function. The services that today tout "electronic payments" are actually orJy
partially electronic, with checks and other paper being heavily used. In fact,
while the customer may transmit the payment order to the bank electronically,
today the bank often must forward payment to the payee with a paper check.
The Visa bill payment solution is the first system that connects consumers and
merchants electronically and is two-way. By streamlining the process we trim '
the time necessary to move payments and drastically cut the costs of doing so.
Consumers can pay their bills in an on-line direct manner easily and
inexpensively. This process could save billers such as utilities, telephone
companies, and insurance companies anywhere from 25 to 75 percent of their
costs for remittance handling and invoicing. And that could mean enormous
savings for consumers and financial institutions.
Electronic Commerce
Remote banking is only one area of on-line services into which Visa and its
members are quickly moving. Electronic commerce over open networks such as
the Internet is a technology-driven market that is exploding and Visa is working
with its members to facilitate this rapidly evolving electronic marketplace.
While many are addressing various aspects of this developing market through
exciting technology, Visa is building business solutions to meet this market's
needs. Our first initiative in this area is providing security for payments made
154
over open networks such as the Internet. Regardless of the technology, the real
game when transacting business over the Internet is knowing who you're doing
business with. The groundbreaking efforts of Visa and its members in working
with Microsoft to build a standard for making transactions secure wall allow
consumers and merchants the confidence and protection they need to use this
new commercial arena successfully. This security — and knowing who you're
doing business with ~ will be key to the future of our country's payment system.
These products and services are just the tip of the proverbial iceberg. From
virtual reality banking to value exchange through infrared beams, exciting new '
possibilities are continuously being explored, supported and developed by Visa
and its members.
Regulatory Issues Relating to Future Payment Systems
The products and services I've outlined will be offered by Visa's member
institutions, which today are the major providers of payment system services to
our nation's consumers. Confidence in those institutions and the payment
services they provide is high, and for good reason. They are regulated by the
federal financial institution supervisory agencies and are subject to regular
examination by these agencies and state supervisors. Customers' funds are
protected by the safety net of federal deposit insurance. As a result of these
protections, the public has a high degree of confidence in our members and their
products and services, which is essential for economic stability and growth.
Some electronic payment services may be offered through entities that are not
subject to the same supervision and regulation as Visa's members. Their
155
customers will not have the protection of the bank supervisory system.
Furthermore, to the extent that these entities, as a result of not being regulated
by bank supervisors, enjoy a competitive advantage over traditional financial
institutions, they may worsen the disintermediation of traditional depositories.
For this reason and because of the importance of developing electronic payment
systems to the world economy and the importance of preventing abuse in these
systems, it is significant to note that a recent report by the European Union's
Working Group on EU Payment Systems proposed that only banks be allowed to
issue stored value cards.
Visa also believes that providing new payment products and services through
regulated and supervised financial institutions ensures significant safeguards
that are not otherwise available. As stored value cards become an important
medium of exchange, policymakers must be cognizant of the potential economic
consequences that would result from a loss of public confidence in major
unregulated, uninsured issuers. Law enforcement officials combating criminal
activities like tax evasion, counterfeiting and money laundering should consider
the potential problems that could result from the development of stored value
card systems that, unlike Visa's, may not generate a well-defined audit trail and
also could result from systems whose record-keeping is not subject to periodic
supervision and examination. Accordingly, Congress should carefully examine
the risks that are attendant with participation by these other entities in the
payment system.
On the other hand, in view of the highly regulated environment in which our
members operate and the numerous safeguards that are already in place with
respect to depository institutions, we are concerned that additional regulation in
156
this area will stifle the innovations that are being developed. Products and
services such as those described here are in nascent stages and could be
adversely impacted by overregulation. At the extreme, subjecting many of these
products to government regulation could result in their premature death.
The potential application of the Electronic Funds Transfer Act and Regulation E
to stored value cards is an excellent example of this. Regulation E requires that
consumers get receipts for electronic funds transfers, such as ATM transactions.
If applied to stored value cards, the product will lose its utility entirely for many
of its essential applications. As 1 noted earlier, one of the most practical
applications of the card will be at vending machines, parking meters and other
facilities and merchants geared to small dollar transactions. Stored value cards
will not be economically viable if machines must be re-engineered to give the
user a receipt for a 75 cent soda or 30 minutes at a parking meter.
Also, keeping in mind that one need not have a banking relationship to get a
stored value card, that a name and address are not necessary and that value on a
card may be used quickly, the periodic statement requirements of Regulation E
also would destroy the product's utility. These cards will be available at a
variety of locations, including dispensing machines such as those used to
dispense Metro fare cards on the D.C. transit system. It simply is not
economically feasible to equip these machines to obtain, store and transmit all
the personal information needed to comply with the periodic statement
requirements of Regulation E.
Moreover, it would be extremely difficult and costly, if not impossible, to
develop additional products consumers demand such as electronic bill payment,
10
157
other remote banking products, and electronic commerce if their development
were stunted by premature and burdensome regulation rather than letting the
marketplace shape the new technology.
These are only a few examples of how product development, if shaped by
regulation, rather than by market forces, would be stunted. Laws and
regulations should not be implemented unless they have been proven to be
necessary and they can be implemented without imposing excessive costs and
burdens. Other countries have encouraged innovation by letting products take
shape without undue interference. In order to encourage development and
create an environment in which the U.S. can assume a leadership role in these
endeavors, we need to do the same. We urge Congress to avoid adding to the
regulatory burden of depository institutions, and permit the public to continue
to enjoy the benefits of new products and services that Visa and its members are
bringing to market.
Once again, I would like to thank the Members of the Subcommittee for the
opportunity to testify.
11
158
Coin World July 17, 1995
vol 36 no 1840
^isa poised to replace small notes, coins
with chip-based debit cards in United States
Electronic cash may
soon be a way of life
By Richard Giedroyc
COIN WORLD SUIT
Stored value prepaid debit or
"smart cards" will begin replacing
coins in circulation sooner than
many Americans think.
See related story Page 67
Visa, the credit card giant, is now
preparing prepaid debit cards to be
mass marketed m the United States.
Visa TravelMoney cards for car-
rying cash anywhere in the world
and Visa Stored Value Cards are
now bemg prepared for use in the
United States. The cards were
unveiled March 23 in New York.
Visa IS implementing a variety of
stored value card pilot programs in
selected cities in all five Visa
regions: Asia-Pacific, Canada.
Europe/Middle Easi/Afnca, Latin
Amenca and the United States.
Four U.S. financial institutions
will issue the Visa debit card during
1995. Bank of Amenca has already
issued cards to Visa employees at
Visa iniemational headquarters in
California.
The cards used at Visa headquar-
ters have created a form of a test
market. The cards have a micro-
computer chip and are capable of
stonng value electronically. They
can be loaded from an automatic
teller machine (ATM) directly from
the cardholder's bank account.
First Union Bank, NationsBank
and Wachovia Bank have individu-
ally agreed to participate in the Visa
pilot for the 1996 Summer
Olympics to be held in Atlanta.
Visa has been an Olympic spon-
sor since 1988 and has been desig-
nated as the "Official Card of the
VISA STORED Value Card with $20 storage capacity In its
microchip, which is located in the circle at left, will soon be
available to be used to make cash purchases of goods and
services in the United States.
Olympics."
Cards previously introduced in
the United States by other firms
pnmarily use a magnetic stnp to
store value or are "remote cards"
where someone must telephone a
computer to activate credit value
stored in that computer that is iden-
tified through a pin number on the
card. Remote cards have no value
physically stored on them.
Visa Corporate Relations
spokesman Barbara Kalcus told
Coin World the Visa Stored Value
Cards are used in vending
machines at Visa headquarters
offices by day and are downloaded
to the proper bank account by night
when the telephone rates are at
their lowest.
According to Visa information
supplied by the marketing firm
Design One in San Francisco;
"From the moment the cards were
introduced, employees responded
with an overwhelmingly high level
of interest and enthusiasm.
"Visa found that many $5 cards
were kept by employees for their
unique and whimsical qualities,
and as a result of the card's conve-
nience and populanty, the $20
Please see VISA Page 67
159
Coin World July 17, 1995
vol 36 no 184 0
p2/2
VISA from Page 1
cards sold out much faster than anticipated.
"The pilot program's results gave senior
management the needed mfonnation to se-
riously consider mtroducing Visa Stored
Value Cards to their employees worldwide
and then ultimately to the general public."
Visa is forming a vendor partnership
program with 20 of the world's market
leaders in the consumer payments industry
to develop terminals and cards designed to
support common chip specifications. The
goal IS inter-operability, where a card can
work in any stored value system intema-
lionally.
The cards are planned to be usable in
laundromats, vending, fast food purchases,
grocery and convenience stores, school
cafeterias, pay telephones, gas stations.
taxies, mass transit, road and toll bridges,
parking, newspaper purchases and entry to
stadiums and theaters.
According to Design One information,
the Visa TravelMoney cards will have
graphics of a globe nestled among scroll-
like graphics meant to look similar to en-
gravings used on U.S. paper money.
Shades of green, gold and blue were cho-
sen "to add warmth while simultaneously
communicating a contemf>orary image."
Design One was asked by Visa to de-
sign a $5 commemorauve card and a $20
value card. The 3.000-card issue of $5
cards was a gift to Visa employees. The
$20 card was made available at Visa head-
quarters and could be used to make vend-
ing machine purchases at that facility. G^
160
An
world
of 'digital casliF? J^w(i-fir-
it were a remote control for a elf
Mobile computing requires
mjiBiaturisation and there is a
natural phyrical limit to how
small a computer can be made.
After all, a keyboard nmst be
large enough to be comfortable
and a screen cannot get too
small without becoming
unreadable. ' ■'
But if users dispense with
the keyboard, and if they do
not need a large display area,
mobile computers could one
day become electronic wallets.
They could "store "digital
cash," display pictures of fam-
ily members, carry distal busi-
ness cards - all the things that
people have in their regulai*
waUets, torites Tom Foremski.
These wallet PCs might seem
fanciful and even sli^tly ridic-
ulous, but they are a goal of US
and European researchers and
they could become a realistic
option by the end of this
decade.
One of the most vocal sup-
porters of the wallet PC idea is
Microsoft chairman Bill Gates.
At the Comdex/FaU computer
show last year, he introduced a
film depicting Microsoft's view
of the future, specifically how
people will be using new tech-
nologies in Microsoft's home
town of Seattle, ten years from
now.
The most striking aspect of
this imagined world was that
there was no cash, at least not
in the familiar physical sense.
Purchases were made using
small, wallet PCs that used
wireless infra-red links to
make and receive payments.
Paying for a cup of coffee from
a street vendor was as simple
as pointing the wallet PC as if
television set and pushing a Wf$
button. A mother was shown ^^
giving her son his weekly ^^9f
pocket money by making a V
wireless transfer from her wal-
let PC to his.
With Gates a keen advocate
for wallet PCs and with Micro-
soft's enormous influence on
the IT industry, a techncdogy
direction has been set that is
certain to attract other compa-
nies. After all, thne is a poten-
tial market of hundreds of mH-
Uons of customers in the US
alone, not to mention the bil-
lions of people worldwide
yearning for their own elec-
tronic iK^ets.
Microsoft is not alone in
exploring the idea for wallet
PCs. The European Union's
Esprit research program has a
project called Cafe (Conditional
Access for Europe) which is
working on design and secu-
rity issues related to creating
an electronic wallet. The Cafe
wallet will also use infrared
technology for wireless pay-
ments and' iptrototypes are
being prepared for trials later
this year.
To prevent others from steal-
ing digital cash transmissions,
Cafe is using public key cryp-
tography technology which
makes each payment specific
to the recipient The results of
several other Esprit research
projects will eventually be
included in the Cafe project.
These include Cascade (Chip
Architecture for Smart Card to
your home. The same could
happen with watching TV -
the capability to instantly buy
anything you hear or see.
161
THE NEW YORK TIMES. MONDAY. JUNE a i99i
Microsoft
Developing
Electronic
Cash Card
By SAUL HANSELL
Microsoft's dominant software
business often seems like a Ucense to
pnnt money. But now the company
wants to go a step further and make
cash itself, at least the electronic
kind.
Microsoft is developmg a plan to
offer plastic cards embedded with
microchips, known as smart cards,
that can be used to make payments,
said Warren T. Dent, the director of
business development for the com-
pany's consumer systems division.
"I hope m a year or so we are
testing something with a stored-val-
ue card." Mr. Dent said. The mitial
test may be with Microsoft's own
employees before the technology is
offered more widely, he said.
Microsoft would be entenng what
has rapidly become a crowded field
of companies hoping to become to
electronic money what Microsoft is
to computer software In July, two
large Bntish banks will begin testing
Mondex, a so-called electronic purse
card, which stores cash. Mondex is
economical for small purchases be-
cause merchants would not need a
telephone link to a central computer.
The card's current value is impnnt-
ed on the card, which means losing
the card is like losmg cash. A debit
card, by comparison, is more like an
electronic check.
Mastercard International and
Visa International are also develop-
ing chip cards that can hold cash, as
are Bank of America and other
banks. Separately, a number of mde-
pendent companies have started to
create schemes for sending pay-
ments over the Internet, m which
cash is loaded onto computer disks
rather than on smart cards.
Microsoft is working with chip
manufacturers to develop the speci-
fications of its card, and then ex-
pects to approach banks that would
stand behind the payments on the
card. Executives of several of the
country's largest banks say they
have been approached by Microsoft.
"No matter how much technology
you have, one day someone will out-
fox you," said Richard Lonergan,
executive Wee president of Visa.
"The bank card systems have the
risk-management and early-fraud-
detection systems that they don't
have."
Microsoft might have difficulty
finding partners. It fnghiened many
baiOters with its now-aborted plan to
acquire Intuit Inc., the maker of
Quicken personal finance software,
which was seen as an attempt to
dominate the market for computer-
ized banking and payments known
as electronic commerce. Microsoft's
chairman. William T. Gates 3d. did
not make any financier friends when
he was quoted as calling bankers
"dinosaurs."
Last week, Mr. Gates tried to
mend fences at a meeting in Seattle
of the 100 top executives of the
world's largest banks. "I actually
said the computer systems of banks
are dinosaurs," Mr. Gates said at a
news conference after the meeting.
Mr. Gates said Microsoft would
develop smart cards, software pro-
grams and other programs that
would work with banks.
"In no way will we be competition
to banks in what we're doing," Mr.
Gates said. "We're coming up with
ways for banks to use our technol-
ogy. We will never be in the busmess
of doing what banks do."
Microsoft officials have long ex-
pressed a desire to write operating
systems and software for computer-
ized devices of all shapes and sizes.
The company has already intro-
duced a watch, in conjunction with
Timex, that stores telephone num-
bers and appointments.
□ectronic Cash
Digital smart cards look like credit
cards, but tney have an embedded
microchip that can perform a vari-
ety of functions. Microsoft is devel-
oping a smart-card system that
v^ould compete with several others
aiming to replace cash with digital
money that would be stored on a
card and be spent for small pur-
chases
Unlike today's debit cards, which
electroncially transfer money from
a customer's checking account,
the cash value would be digitally
stored on the card itself Retailers
would use a smart-card terminal to
deduct the amount for each pur-
chase At least four other organiza-
tions are developing such cards,
which they plan to begin testing
over the next year
Monctex
START DATE July 1995
Test in Swindon, England, of
electronic cash card, backed by
two of Britain's largest banks —
National Westminster Bank and
fvlldland Bank — with the inten-
tion of eventually signing up
other banks around the world.
MMterCard
START DATE By end of 1995
Test in Canberra, Australia, of
smart card that combines elec-
tronic cash with existing credit oi
debit cards to be issued by four
Australian banks
ViM
START DATE Summer 1996
Test of electronic cash cards at
Summer Olympics in Atlanta wit
three banks: Nationsbank, First
Union and Wachovia.
Electronic Payment S«rvtcM
START DATE July 1996
Test of Electronic Cash Card in
Delaware by MAC Automated
Teller Machine network
162
►ANKLETTER
A PUBLICATION OF INSTITUTIONAL INVESTOR. INC
VOL XtX NO. 25
IN THE NEWS
SFA eyes rating list for U.K.,
intemulional banks 2
Qisc papLT trades up, refi likely 4
SocGcn picks up banker,
expands .^yndivations desk 4
Moody's rates Fathmark,
£ckcrd credits S
WASHINGTON
Treasury pick.5 strategy team
Baicer holds firm on
Rcfcorp formula
Leucli urges Japan to address
banking crisis
CBD, BEA funding m:iy live
JUNE 26, 199S
MINT DIRECTOR EYES GOVERNMENT ROLE
IN PLASTIC MONEY— TREASURY ON BOARD.
Electronic money— smart cords or "£-cash" — is coming, and U.S. Mini Director
Philip Diehl wants the govemnicnt to tliink about getting in the game. Iti an inter-
view with Bank Leitcr, Dielil says he lias recommended to tlie Treasury Depart-
ment that in phase two of the Clinton Administration's "reinventing government"
it take a look at the new kind of money and its implications for *he old currency an J
coin-type money the govprnmeut makes now. A spokcswom.in for Treasury said.
"Several p.Trts of Treasury arc looking al possible uses of the smart card. The Fi»
nanciul Sl.-inagcmeiit Service is spearljcading tliis." Diehl indicates he himself
is open to the idea ihot maybe die U.S. sliould offer both a ^mart ciai^ .ind a debit
card. Diehl says his suggestion that Treasury, which oversees the Mint, ought to
look into these possibilities »vas well received at tlic department.
There cnuld be government cards side by side %vith private-sector ,<;mart cards.
MINT DIRECTOR IcnniuiutdfmmpiLKC II
Diehl says. Or the feds could be a critical part of pri«te-see-
tor devclopmf-nt of the new stored value cards. "We might
provide criticnl mass." he says — "a universal standard for »
univcrsol cnrd." Technolo^ for machines accepting the cards
could be made uniform everywhere, thereby greatly expand-
ing the marketplace. The problem for issuers of the new
sriurt cards would be how to make them as universally ac-
ceptable as today's coins.
Up on Capitol Hill, where the ultimate decisions about
coins versus electronic cash will eventually be made, thert
has been a perceptible shift of interest in recent weeks. The
niouetarvpoliev subcommittee of House B.inkinghns begun
to formulati; unannounced plans for o series of heanngs.
surting July 25. whicli hove been tentatively entitled "The
I'uture of Money." The hearings will examine the implica-
tions of electronic cash.
Since the district ofrhechainniin of the subcommittee. Rep
Michael Ciiitle ( K-Dcl.). includes more povato-si-ctor card ii-
si.iers than any other eoiignr«ional district iii the country, the
pane! is likely to be more interested in how ilie government can
fiiL-ilitate 12-cash rhiin take it over Cisde mdicited there is no
set agenda for the hearings yet. "\Ved like to take a look at the
entire spectrum of limidess possibilities that have opened with
money." the lawmaker said.
Diehl thinks the new electronic money, a market which
several hanks and 'other issuers are wnding into, will be a
much more fundamental change than the introduction of
credit cards. Already, for a decade there have been prep.iid
cards to pay for single-purpose spending such as on subw.iy
trips or phone calls.
But these have been restricted both as to where they
could be used and for what purpose. Now in the plannmg
stage, however, is a next generntinn of stored-value cards
with a computer chip inside that it is envi.^aged will be us-
able in a vanety of locations for a broad range of purchas-
es— E-cosh.
"I think it's in Treasury's interest ro reeogniie that elec-
tronic forms of cash are inevitable," Diclil says. "And w(
need to think through wh.-it is the federal government':
role." A source with a major card issuer argues if "the pn
vate sector is re.idy. willing .nnd able to do it, wliy have ai
inefficient government monopoly?"
Diehl concedes there are parochial reasons why the Min
would w.int to build up business by following the customer
for money .-iway froin cmns and into die electronic future
But he disavows .iny set agenda. "Maybe there is no appro
pnatc role for rhe federal government." he says. Even so. h
says, there is still something to be gained by exploring th
possibilities.
—Stan WiJjo;
163
STATEMENT OF HEIDI GOFF
ON BEHALF OF MASTERCARD INTERNATIONAL INCORPORATED
BEFORE THE SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL
MONETARY POLICY
OF THE
COMMITTEE ON BANKING AND FINANCIAL SERVICES
ON THE FUTURE OF MONEY
JULY 25, 1995
164
Mr. Chairman, members of the Subcommittee, my name
is Heidi Goff . I am the Senior Vice President for Global
Point of Interaction of MasterCard. I thank the
Subcommittee for the opportunity to testify on these
important issues.
There are many forces for change at work in the
payments industry today. Their convergence will shape the
options consumers will have to make payments world-wide well
into the 21st century. Twenty- five years ago, credit cards
in the United States were considered a payment vehicle for
the privileged. Today, credit cards are a convenience for
the majority of Americans. And, debit cards provide this
convenience for people who choose not to use credit . As
payment systems evolve, MasterCard continues to work
diligently to be thoughtful and understanding of our role in
developing services that are secure and provide value to the
system participants.
Today, the forces for change include technology
advances in communications, integrated circuits, image
processing, data storage and artificial intelligence.
Telecommunications are faster and more ubiquitous.
Integrated circuits are finding their way onto payment cards
throughout the world, vastly increasing the ability to
provide payment services in a secure manner. In addition to
the storefront on main street, merchants have migrated from
catalogue and telephone sales, to electronic storefronts on
information networks, such as America On-line and CompuServe
and on the Internet. Consumers now browse through product
images in their homes making purchasing decisions with
maximum information and no pressure.
Changing consumer behavior is having a profound
effect on how payments are made. Most consumers today are
under greater time pressure. Consumer research tells us
that time is one of our most highly valued commodities. For
the payments business that means giving consumers the
services and access they want wherever and whenever they
want it.
At the same time, people are becoming increasingly
comfortable with technology. More than half of all U.S.
households have computers. And as prices come down, those
numbers will go up. Just look at the increase in the use of
remote delivery methods such as ATMs, cash dispensers and
screen telephones. A recent Bank Administration Institute
study found that 77 percent of all U.S. households use
remote delivery methods to do at least part of their
banking. The younger the consumer, the greater the tendency
not to go to a teller. Banks are trying to encourage this
165
shift as well. It is simply more cost-effective. Right
now, technology driven transactions account for more than
half of all banking transactions -- 31 percent by ATM,
24 percent by telephone, and 2 percent by other means such
as remote banking.
As I mentioned, integrated circuit cards are now
enabling new payment methodologies such as stored value or
pre-paid cards as well as new security measures which will
protect consumers from more sophisticated criminals.
Integrated circuits and chip cards, interchangeably referred
to as smart cards, will improve the way we make payments,
and create new value for the consumer and the banking
community.
Today's magnetic stripe card technology can store
just a few lines of information. However, a smart card,
which can store pages worth of information, can support
multiple functionalities; in other words, it can be a credit
card, a debit card, and a stored value card wrapped into
one. It can also store other information, such as frequent
flier or loyalty program points, discount coupons, or
insurance information. The consumer will decide what
information is stored on the card and what functionalities
it will contain.
On the merchant side, stored value cards will allow
cash-based merchants to accept payments without the expense
of maintaining on-line connections to issuers for
authorizations. Once the card is validated, the cash value
is deducted from the card. And consumers can load more cash
onto their cards as needed from an ATM almost anywhere they
happen to be. Loyalty programs maintained on chip cards
have endless possibilities for merchants to give consumers
reduced price or no- cost goods and services instantly at the
time of each transaction.
The smart card also can offer consumers greater
security. By encoding the card with a personal
identification number, a merchant terminal can verify the
cardholder without ever going on line. The cardholder
simply inputs his or her PIN, the card and terminal interact
to authenticate the PIN number using secure cryptology and
if the PIN is correct the card is accepted. Through unique
card authentication methodologies, the terminal also will
validate that the card is authentic, not a counterfeit.
MasterCard, VISA, and Europay have been working
together to develop a single global standard for smart cards
and the terminals that accept them. We want to be sure that
just like today's credit cards, any terminal will be able to
166
accept any card. Our progress has been impressive. Already
specifications for cards and terminals have been developed.
In addition, we are scheduled to begin our first microchip
application pilot -- a stored value card -- in Australia
later this year.
Expanded Networks
While chip technology will add greater flexibility
to payment cards, increased connectivity is giving consumers
broader acceptance for those cards. As a result, the point
of sale -- a physical place defined by the merchant's
locations --is migrating to a "point of interaction" -- a
virtual place defined by the consumer's location.
There are two pieces to the connectivity
equation -- expanded networks and a growing number of
on-line services. By networks, I'm talking about physical
connections, rather than services. Three of the most
commonly recognized are telephone networks, cable networks
and satellite services. Each of these networks offers a
potential path for carrying value transactions. Consumers
can do their banking by phone - - in some places they can
bank on their television screens. The bottom line is that
the availability of these expanded networks increases our
ability to serve more and more consumers efficiently and
effectively.
The Growth of On-Line Services
On-line services are the other half of the
equation. While there are more ways to hook in - - there are
also more things to hook to. The electronic superhighway is
expanding exponentially. Every day new services become
available -- and every day the traffic becomes heavier.
More than 25,000 merchants in 150 countries are already on
the Internet. It also has 20 million users right now. By
the year 2000, our estimate is that more than 100 million
people around the world will be connected to the Internet.
And you can be sure anyone that has anything to sell will be
connected to it as well .
One important role for the payments industry will
be ensuring that those value transactions are secure. Right
now, with few exceptions, if you send your account
information across the Internet, you may be leaving yourself
vulnerable - - because those transactions are conducted on
unsecured lines. Together with others, we have been working
to ensure that on-line transactions can be made securely.
And by year end, that will be the reality.
167
Protecting Privacy
We are also acutely aware that many consumers feel
that the greater access to information that the smart card
and expanded networks create raises concerns about their
privacy. Last year, we joined with Yankelovich Partners to
assess the privacy concerns of today's consumers. We also
looked at the potential for using personal data for more
efficiently offering ser-vices to consumers who want them,
better fraud protection, and improved customer satisfaction.
We recognize that if consumers don't trust us to protect
their privacy, they're not going to use our products.
Bottom line, consumer trust is key to our continued success.
We're currently working with our members to develop
effective privacy guidelines.
Adding Value
As a payments franchise, we have committed
ourselves to adding value -- value as consumers define it:
convenience; security; and flexibility. Technology will
enable us to fulfill this commitment more fully. Our
members will be able to offer to more and more consumers a
payments card that fits his or her specific -- and
changing -- needs. And that's a good thing.
Going forward, we are dedicating ourselves to the
cost-effective implementation of a flexible payments system
infrastructure that provides value to consumers throughout
society. And by value we mean the broadest range of
products and services - - unsurpassed acceptance at all
points of interaction -- and top quality customer service
and security --no matter where the cardholder is. To
accomplish this goal will require an atmosphere conducive to
creativity and variety. In order to achieve this, we
recognize the need to work closely with regulators and
legislators to create a healthy and accessible payments
system that will serve us well in the years to come.
Thank you again for the opportunity to address the
Subcommittee. We look forward to working with you to create
a future that serves the best interests of both consumers
and American financial services firms.
168
Intuit
64 Willow Place
P.O. Sox 3014
Menio Park, California 94026-30M
Testimony of Scott D. Cook, Chairman, Intuit Inc.
before the House Banking Subcommittee
on Domestic and International Monetary Policy
July 25, 1995
on the Future of Money and Payment Systems
Mr. Chairman, Mr. Vice Chairman, members of the subcommittee, thank you for the
opportunity to speak to you this morning. My name is Scott Cook. I am the co-
founder and chairman of Intuit Inc. , located in Menlo Park, California.
I'm sure you've all heard the word electronic commerce a lot recently. Some of you
may be wondering what Intuit means when we say electronic commerce.
Electronic commerce is no different from regular commerce in that there are many
facets to it. For example, dry cleaners and TV stations are both involved in commerce,
but in different areas. Intuit is involved in an entirely different part of electronic
commerce than some of today's panelists.
For example, some companies are focused on creating new payment systems. Some
companies are focused on allowing people to purchase goods electronically. Intuit' s
focus is different. Our focus is on providing people and small businesses with tools
and PC technologies to communicate with existing banks, brokerage and other financial
services in new ways that help them make simply smarter financial decisions. We are
not creating new kinds of money.
If you know my company at all, you probably know it for our first and flagship
product, Quicken, which is the world's most widely used personal finance software. In
fact, it is the nation's best-seUing software application. However, Quicken is just one
of the products that Intuit makes to try to achieve our goal of improving the financial
lives of consumers and small businesses by helping them make better fmancial
decisions. Our other products include:
Quicken Financial Planner, which delivers a personal retirement plan showing each
consumer how they should save and invest to successfully fund their retirement. It
is the best-selling software of its kind.
TurboTax and Maclntax, the nation's best-selling tax preparation software which
enable both consumers and small businesses to file their income taxes more
accurately and correctly with far less hassle.
169
Parents Guide to Money, software which helps new parents with the four financial
decisions that they face: life insurance, child care, college savings and health
insurance.
Quicken Mutual Fund Selector, software which gives consumers unbiased
information to decide which of the thousands of mutual funds meet their objectives.
Also for small businesses we make:
QuickBooks, the nation's best selling accounting software, which keeps books and
shows a business person his or her financial condition in graphics and plain English.
QuickPay, the nation's best-selling payroll software, which helps businesses do
accurate payroll for their employees.
We also proudly export American technology. To date, our products are the best
sellers in every country that we have entered.: Germany, the United Kingdom, Canada,
Australia, New Zealand and Austria. That means we outsell every competing product,
foreign or domestic, in those markets.
Let me demonstrate what I mean by enabling people to make simply smarter financial
decisions.
The important financial decisions people make concern their savings, investments,
retirement planning, college savings, insurance decisions, buying a home, financing
and re-financing that home, and more. These decisions are not new, but they re quite a
bit more complex today for many people than they were 30 or 40 years ago.
Let's look at one example, retirement plaiming. We all know that structural changes in
pension and Social Security benefits have moved the burden of funding retirement onto
the consumers' shoulders. Yet, when I speak publicly I ask audiences of computer
owners if they have a retirement plan in place — not simply a 401K — but a plan that
will build a nest egg sufficient to see them through retirement. Only about five percent
raise their hands. This is a national tragedy in the making.
Millions of working Americans will retire in poverty, not in prosperity unless they put
a retirement plan in place in the next few years. Yet only five percent have retirement
plans. Why don't they? Because financial planning is too complex for consumers to
do unaided. Sometimes, the pros who are supposed to aid people don't always get it
right. And a truly unbiased financial adviser is so expensive that only the very rich can
afford it. Books are helpful, but they don't give the answer because they are
customized to each person's individual nec^' and circumstances.
Page 2
BOSTON PUBLIC LIBRARY
170
3 9999 05570 762 2
We at Intuit are trying to change this. With software we just introduced this spring,
called the Quicken Financial Planner. It delivers an unbiased retirement plan,
personalized to each consumer's specific situation. It costs $39, which makes financial
planning available beyond the richest 3 percent of households to any of the 30 percent
of American households with a PC. That's a 10-fold expansion in availability.
(Mr. Cook will demonstrate Quicken Financial Planner at this point)
Mr. Chairman, just a few days ago my company announced we're working to further
enhance people's ability to make better financial decisions by giving them a
communication link to their bank that will deliver financial information in a rich an
automatic fashion.
We are working with 17 of the nation's largest and most trusted banks, plus American
Express and Smith Barney to connect them electronically to Quicken customers. This
service will provide:
Electronic delivery of bank brochures and marketing information.
Access to bank statements electronically, in addition to getting them in the maU.
The ability for customer to electronically ask their bank to transfer funds between
accounts, in addition to asking by telephone, by ATM or in person as they do
today.
The ability to pay bills, enhancing a service banks have offered since the early
1980s, in addition to paying bills by check through the maU as they do today.
The ability to use other Quicken products such as the Quicken Financial Planner
without the need to re-enter the same data.
This work is based on a simple premise: customers and financial institutions both seek
closer and deeper relationships. I haven't met a banker yet who did not want closer
relationships with their customers. Customers want to be able to deal with their bank
whenever they want - over the weekend or nights.
These close relationships are unfortunately difficult to arrange today. Financial
institutions are wonderfully automated and their products are essentially electronic
products. On the other hand, there is a gulf between that automation and the consumer
It is a gulf filled with established methods, such as branches, postage and mail,
advertising and people on telephones. These can be costly and all too often impersonal
— as anyone who receives junk mail knows.
What we are doing is to build another method of communication. This will enable the
bank customer to be reached, to be served, to be sold in their homes and offices
whenever the customer wants — 24 hours a day, 7 days a week.
The financial institution benefit is initially in cementing relationships with current
customers and helping them gain new customers. linger term, there will be some nice
Page 3
171
cost implications. Ultimately the cost of electronic commerce is built on the
fundamental cost of silicon and software -- costs that go down over time. Such a trend
can only help banks become more competitive in a financial services market that is
truly global. That is good news for the American economy and for your constituents,
whose taxes guarantee bank deposits.
Keep in mind that electronic commerce has many suppliers and many channels. This
will not be something like cable TV or local phone service where there is one supplier
and one channel. Instead, this will be like magazines and radio stations, where there
are dozens or hundreds of competing entrants. Intuit is not alone. Some of the biggest
names in telecommunications and technology have formed alliances to provide
competing electronic commerce services.
The last point I'd like to make about the piece of electronic commerce that we are
working on is that there are other benefits.
With software like ours, people will achieve their financial goals better than they have
achieved them in the past. The reason is they will have more timely, better organized
financial information and be able to use other products that will help them make
smarter financial decisions. I believe people will avoid some of the problems that they
run into in finances. There will be fewer bad debts and fewer personal bankruptcies, a
higher savings rate in the United States and simply more confidence that comes as
people are empowered with great tools to help make these decisions. That is our
mission and what we and our financial institution partners are trying to achieve.
Finally, Mr. Chairman I have not come here today to seek any action. I am here to
provide you with information. However, to the extent that you move forward in this
area, I would ask you to consider that there are many excellent rules that are in place to
protect consumers and ensure a strong financial services industry. Many of those rules
were written before a PC was a glimmer in the imagination. Some of them might need
to be updated to reflect the advent of the PC and what PC-owning consumers want.
Thank you, Mr. Chairman, ru be glad to respond to any questions you or other
members of the subcommittee may have.
-30-
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